LEVI STRAUSS & CO
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
|
or
|
||
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended November 28,
2010
Commission file number:
002-90139
LEVI STRAUSS &
CO.
(Exact Name of Registrant as
Specified in Its Charter)
|
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization) |
94-0905160
(I.R.S. Employer Identification No.) |
1155 BATTERY STREET, SAN FRANCISCO, CALIFORNIA 94111
(Address of Principal Executive
Offices)
(415) 501-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer or a smaller reporting company. See definition of
“Large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
|
Large accelerated filer
o
|
Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The Company is privately held. Nearly all of its common equity
is owned by descendants of the family of the Company’s
founder, Levi Strauss, and their relatives. There is no trading
in the common equity and therefore an aggregate market value
based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
Common Stock $.01 par value —
37,323,947 shares outstanding on February 3, 2011
Documents incorporated by reference: None
LEVI
STRAUSS & CO.
TABLE OF
CONTENTS TO
FORM 10-K
FOR
FISCAL YEAR ENDING NOVEMBER 28, 2010
1
Table of Contents
PART I
| Item 1. | BUSINESS |
Overview
From our California Gold Rush beginnings, we have grown into one
of the world’s largest brand-name apparel companies. A
history of responsible business practices, rooted in our core
values, has helped us build our brands and engender consumer
trust around the world. Under our brand names, we design and
market products that include jeans, casual and dress pants,
tops, skirts, jackets, footwear, and related accessories for
men, women and children. We also license our trademarks for a
wide array of products, including accessories, pants, tops,
footwear and other products.
An
Authentic American Icon
Our
Levi’s
®
brand has become one of the most widely recognized brands in the
history of the apparel industry. Its broad distribution reflects
the brand’s appeal across consumers of all ages and
lifestyles. Its merchandising and marketing reflect the
brand’s core attributes: original, definitive, honest,
confident and youthful.
Our
Dockers
®
brand was at the forefront of the business casual trend in the
United States. It has since grown to be a global brand covering
a wide range of khaki and khaki-inspired styles for men and
women with products rooted in the brand’s heritage of the
essential khaki pant. We also bring style, authenticity and
quality to a broader base of jeanswear consumers through our
Signature by Levi Strauss &
Co.
tm
brand and our recently-launched
Denizen
tm
brand.
Our
Global Reach
Our products are sold in more than 110 countries, including
established markets, which we refer to as mature markets, such
as the United States, Japan, and Western Europe, and developing
markets, such as India, China, Brazil and Russia. We group these
markets into three geographic regions: Americas, Europe and Asia
Pacific. We support our brands throughout these regions through
a global infrastructure, developing, sourcing and marketing our
products around the world. Although our brands are recognized as
authentically “American,” we derive approximately half
of our net revenues from outside the United States. A summary of
financial information for each geographical region, which
comprise our three reporting segments, is found in Note 19
to our audited consolidated financial statements included in
this report.
Our products are sold in approximately 55,000 retail locations,
including approximately 2,300 retail stores dedicated to our
brands, both franchised and company-operated. We distribute our
Levi’s
®
and
Dockers
®
products primarily through chain retailers and department stores
in the United States and primarily through department stores,
specialty retailers and franchised stores outside of the United
States.
Levi’s
®
and
Dockers
®
products are also sold through brand-dedicated online stores
operated by us as well as the online stores of certain of our
key wholesale customers and other third parties. We distribute
Signature by Levi Strauss &
Co.
tm
brand products primarily through mass channel retailers in the
United States and Canada and franchised stores in Asia Pacific,
and we distribute
Denizen
tm
products through franchised stores in Asia Pacific.
Levi Strauss & Co. was founded in San Francisco,
California, in 1853 and incorporated in Delaware in 1971. We
conduct our operations outside the United States through foreign
subsidiaries owned directly or indirectly by Levi
Strauss & Co. We have headquarter offices in
San Francisco, Brussels and Singapore. Our corporate
offices are located at Levi’s Plaza, 1155 Battery Street,
San Francisco, California 94111, and our main telephone
number is
(415) 501-6000.
Our common stock is primarily owned by descendants of the family
of Levi Strauss and their relatives.
Our Website —
www.levistrauss.com
—
contains additional and detailed information about our history,
our products and our commitments. Financial news and reports and
related information about our company can be found at
http://www.levistrauss.com/Financials
. Our Website and
the information contained on our Website are not part of this
annual report and are not incorporated by reference into this
annual report.
2
Table of Contents
Our
Business Strategies
Our management team is actively investing in strategies to grow
our business, respond to marketplace dynamics and build on our
competitive strengths. Our key long-term strategies are:
| • | Build upon our brands’ leadership in jeans and khakis. We intend to build upon our brand equity and our design and marketing expertise to expand the reach and appeal of our brands globally. We believe that our insights, innovation and market responsiveness enable us to create trend-right and trend-leading products and marketing programs that appeal to our existing consumer base, while also providing a solid foundation to enhance our appeal to under-served consumer segments. As an example, in 2010 we introduced our new Levi’s ® Curve ID fit system for women. We also seek to further extend our brands’ leadership in jeans and khakis into product and pricing categories that we believe offer attractive opportunities for growth. | |
| • | Diversify and transform our wholesale business. We intend to develop new wholesale opportunities based on targeted consumer segments and seek to continue to strengthen our relationship with existing wholesale customers. We are focused on generating competitive economics and engaging in collaborative volume, inventory and marketing planning to achieve mutual commercial success with our customers. Our goal is to be central to our wholesale customers’ success by using our brands and our strengths in product development and marketing to drive consumer traffic and demand to their stores. | |
| • | Accelerate growth through dedicated retail stores. We continue to seek opportunities for strategic expansion of our dedicated store presence around the world. We believe dedicated full-price and outlet stores represent an attractive opportunity to establish incremental distribution and sales as well as to showcase the full breadth of our product offerings and to enhance our brands’ appeal. We aim to provide a compelling and brand-elevating consumer experience in our dedicated retail stores. | |
| • | Capitalize upon our global footprint. Our global footprint is a key factor in the success of the above strategies. We intend to leverage our expansive global presence and local-market talent to drive growth globally and will focus on those markets that offer us the best opportunities for profitable growth, including an emphasis on fast-growing developing markets and their emerging middle-class consumers, such as the recent launch of our Denizen tm brand in certain markets in our Asia Pacific region. We aim to identify global consumer trends, adapt successes from one market to another and drive growth across our brand portfolio, balancing the power of our global reach with local-market insight. Our recent appointment of newly-created global brand leadership positions is an important element of this strategic goal. | |
| • | Drive productivity to enable investment in initiatives intended to deliver sustained, incremental growth. We are focused on deriving greater efficiencies in our operations by increasing cost effectiveness across our brands and support functions and undertaking projects to transform our supply chain and information systems. We intend to invest the benefits of these efforts into our businesses to drive growth and to continue to build sustainability and social responsibility into all aspects of our operations, including our global sourcing arrangements. |
Our
Brands and Products
We offer a broad range of products, including jeans, casual and
dress pants, tops, skirts, jackets, footwear and related
accessories. Across all of our brands, pants —
including jeans, casual pants and dress pants —
represented approximately 84%, 85% and 85% of our total units
sold in each of fiscal years 2010, 2009 and 2008, respectively.
Men’s products generated approximately 72%, 73% and 75% of
our total net sales in each of fiscal years 2010, 2009 and 2008,
respectively.
Levi’s
®
Brand
The
Levi’s
®
brand epitomizes classic American style and effortless cool and
is positioned as the original and definitive jeans brand. Since
their inception in 1873,
Levi’s
®
jeans have become one of the most recognizable garments in the
world — reflecting the aspirations and earning the
loyalty of people for generations. Consumers around the world
instantly recognize the distinctive traits of
Levi’s
®
jeans — the double arc of stitching, known as the
Arcuate Stitching Design, and the red Tab Device, a fabric tab
stitched into the back right pocket. Today, the
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Table of Contents
Levi’s
®
brand continues to evolve, driven by its distinctive pioneering
and innovative spirit. Our range of leading jeanswear and
accessories for men, women and children is available in more
than 110 countries, allowing individuals around the world to
express their personal style.
The current
Levi’s
®
product range includes:
| • | Levi’s ® Red Tab tm Products. These products are the foundation of the brand. They encompass a wide range of jeans and jeanswear offered in a variety of fits, fabrics, finishes, styles and price points intended to appeal to a broad spectrum of consumers. The line is anchored by the flagship 501 ® jean, the original and best-selling five-pocket jean in history. The Red Tab tm line also incorporates a full range of jeanswear fits and styles designed specifically for women. Sales of Red Tab tm products represented the majority of our Levi’s ® brand net sales in all three of our regions in fiscal years 2010, 2009 and 2008. | |
| • | Premium Products. In addition to Levi’s ® Red Tab tm premium products available around the world, we offer an expanded range of high-end products. Our most premium Levi’s ® jeanswear product lines are managed under one division based in Amsterdam which oversees the marketing and development of these global premium product lines. |
Our
Levi’s
®
brand products accounted for approximately 81%, 79% and 76% of
our total net sales in fiscal 2010, 2009 and 2008, respectively,
approximately half of which were generated in our Americas
region.
Dockers
®
Brand
The
Dockers
®
brand has embodied the spirit of khaki for 25 years. First
introduced in 1986 as an alternative between jeans and dress
pants, the
Dockers
®
brand is positioned as the khaki authority with a range of
khaki-inspired products. In 2009, the
Dockers
®
brand launched the Wear the Pants campaign globally, with a
focus on khakis’ masculinity and swagger, and reminding men
that
Dockers
®
is indeed the world’s best and most loved khaki brand. The
focus on men and pants continues, as the brand modernizes the
category and engages a new generation of men. The brand also
offers a complete range of khakis and khaki-inspired styles for
women, with products designed to flatter her figure and inspire
her individual style.
Our
Dockers
®
brand products accounted for approximately 15%, 16% and 18% of
our total net sales in fiscal 2010, 2009 and 2008, respectively.
Although the substantial majority of these net sales were in the
Americas region,
Dockers
®
brand products are sold in more than 50 countries.
Signature
by Levi Strauss &
Co.
tm
Brand and
Denizen
tm
Brand
In addition to our
Levi’s
®
and
Dockers
®
brands, we offer two brands focused on consumers who seek
high-quality, affordable and fashionable jeanswear from a
company they trust. We offer denim jeans, casual pants, tops and
jackets in a variety of fits, fabrics and finishes for men,
women and kids under the Signature by Levi Strauss &
Co.
tm
brand through the mass retail channel in the United States and
Canada and franchised stores in Asia Pacific. We also recently
launched the
Denizen
tm
brand in Asia Pacific to reach consumers in the emerging middle
class in developing markets who seek high-quality jeanswear and
other fashion essentials at affordable prices. The product
collection — including a variety of jeans, tops and
accessories — complements active lifestyles and
empowers consumers to express their aspirations, individuality
and attitudes.
Signature by Levi Strauss &
Co.
tm
brand and
Denizen
tm
brand products accounted for approximately 4%, 5% and 6% of our
total net sales in fiscal years 2010, 2009 and 2008,
respectively. Given that it launched late in 2010,
Denizen
tm
brand products sales had a limited impact on these numbers.
Licensing
The appeal of our brands across consumer groups and our global
reach enable us to license our
Levi’s
®
and
Dockers
®
trademarks for a variety of product categories in multiple
markets in each of our regions, including footwear, belts,
wallets and bags, outerwear, sweaters, dress shirts, kidswear,
sleepwear and hosiery. We also license our Signature by Levi
Strauss &
Co.
tm
and our
Denizen
tm
trademarks in various markets for certain product categories.
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In addition to product category licenses, we enter into regional
license agreements with third parties to produce, market and
distribute our products in several countries around the world,
including various Latin American, Middle Eastern and Asia
Pacific countries.
We enter into licensing agreements with our licensees covering
royalty payments, product design and manufacturing standards,
marketing and sale of licensed products, and protection of our
trademarks. We require our licensees to comply with our code of
conduct for contract manufacturing and engage independent
monitors to perform regular
on-site
inspections and assessments of production facilities.
Sales,
Distribution and Customers
We distribute our products through a wide variety of retail
formats around the world, including chain and department stores,
franchise stores dedicated to our brands, our own
company-operated retail network, multi-brand specialty stores,
mass channel retailers, and both company-operated and retailer
websites.
Multi-brand
Retailers
We seek to make our brands and products available where
consumers shop, including offering products and assortments that
are appropriately tailored for our wholesale customers and their
retail consumers. Our products are also sold through authorized
third-party Internet sites. Sales to our top ten wholesale
customers accounted for approximately 33%, 36% and 37% of our
total net revenues in fiscal years 2010, 2009 and 2008,
respectively. No customer represented 10% or more of net
revenues in any of these years, although our largest customer in
2010 and 2009, Kohl’s Corporation, accounted for nearly 10%
of net revenues in each year. The loss of one of these or any
major customer could have a material adverse effect on one or
more of our segments or on the company as a whole.
Dedicated
Stores
We believe retail stores dedicated to our brands are important
for the growth, visibility, availability and commercial success
of our brands, and they are an increasingly important part of
our strategy for expanding distribution of our products in all
three of our regions. Our brand-dedicated stores are either
operated by us or by independent third parties such as
franchisees and licensees. In addition to the dedicated stores,
we maintain brand-dedicated websites that sell products directly
to retail consumers.
Company-operated retail stores
.
Our
company-operated retail and online stores, including both
full-price and outlet stores, generated approximately 15%, 11%
and 8% of our net revenues in fiscal 2010, 2009 and 2008,
respectively. As of November 28, 2010, we had
470 company-operated stores, predominantly
Levi’s
®
stores, located in 27 countries across our three regions. We had
190 stores in the Americas, 173 stores in Europe and
107 stores in Asia Pacific. During 2010, we added
79 company-operated stores and closed 23 stores.
Franchised and other
stores
.
Franchised, licensed, or other forms
of brand-dedicated stores operated by independent third parties
sell
Levi’s
®
,
Dockers
®
,
Signature by Levi Strauss &
Co.
tm
and
Denizen
tm
products in markets outside the United States. There were
approximately 1,800 of these stores as of November 28,
2010, and they are a key element of our international
distribution. In addition to these stores, we consider our
network of dedicated
shop-in-shops
located within department stores, which may be either operated
directly by us or third parties, to be an important component of
our retail distribution in international markets. Approximately
300 dedicated
shop-in-shops
were operated directly by us as of November 28, 2010.
Seasonality
of Sales
We typically achieve our largest quarterly revenues in the
fourth quarter, reflecting the “holiday” season,
generally followed by the third quarter, reflecting the Fall or
“back to school” season. In both 2010 and in 2009, our
net revenues in the first, second, third and fourth quarters
represented 23%, 22%, 25% and 30%, respectively, of our total
net revenues for the year.
Our fiscal year ends on the last Sunday of November in each
year, although the fiscal years of certain foreign subsidiaries
are fixed at November 30 due to local statutory requirements.
Apart from these subsidiaries, each
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quarter of fiscal years 2010, 2009 and 2008 consisted of
13 weeks, with the exception of the fourth quarter of 2008,
which consisted of 14 weeks.
Marketing
and Promotion
We root our marketing in globally consistent brand messages that
reflect the unique attributes of our brands, including the
Levi’s
®
brand as the original and definitive jeans brand and the
Dockers
®
brand as world’s best and most loved khaki. We support our
brands with a diverse mix of marketing initiatives to drive
consumer demand.
We advertise around the world through a broad mix of media,
including television, national publications, the Internet,
cinema, billboards and other outdoor vehicles. We use other
marketing vehicles, including event and music sponsorships,
product placement in major motion pictures, television shows,
music videos and leading fashion magazines, and alternative
marketing techniques, including street-level events and similar
targeted “viral” marketing activities.
We also use our Websites,
www.levi.com
,
www.dockers.com
,
www.levistrausssignature.com
, and
www.denizen.com
, as marketing vehicles in relevant
markets to enhance consumer understanding of our brands and help
consumers find and buy our products.
Sourcing
and Logistics
Organization.
Our global sourcing and
regional logistics organizations are responsible for taking a
product from the design concept stage through production to
delivery to our customers. Our objective is to leverage our
global scale to achieve product development and sourcing
efficiencies and reduce total product and distribution costs
while maintaining our focus on local service levels and working
capital management.
Product procurement.
We source nearly
all of our products through independent contract manufacturers.
The remainder are sourced from our company-operated
manufacturing and finishing plants, including facilities for our
innovation and development efforts that provide us with the
opportunity to develop new jean styles and finishes. See
“Item 2 — Properties” for more
information about those manufacturing facilities.
Sources and availability of raw
materials.
The principal fabrics used in our
business are cotton, blends, synthetics and wools. The prices we
pay our suppliers for our products are dependent in part on the
market price for raw materials — primarily
cotton — used to produce them. The price and
availability of cotton may fluctuate substantially, depending on
a variety of factors. For example, during the second half of
fiscal year 2010, the price of cotton increased substantially as
a result of various dynamics in the commodity markets. The
majority of our products sold during that time had been sourced
prior to the increase in cotton prices and therefore the cotton
price increases had little impact during fiscal year 2010. We
have already begun to raise product prices in an attempt to
mitigate the impact of these higher costs. However, continued
fluctuations in price may cause a decrease of our profitability
if we are not able to respond with further product pricing
actions or could impair our ability to meet customer demand in a
timely manner.
Sourcing locations.
We use numerous
independent contract manufacturers located throughout the world
for the production and finishing of our garments. We conduct
assessments of political, social, economic, trade, labor and
intellectual property protection conditions in the countries in
which we source our products before we place production in those
countries and on an ongoing basis.
In 2010, we sourced products from contractors located in
approximately 34 countries around the world. We sourced products
in North and South Asia, South and Central America (including
Mexico and the Caribbean), Europe and Africa. We expect to
increase our sourcing from contractors located in Asia. No
single country accounted for more than 20% of our sourcing in
2010.
Sourcing practices.
Our sourcing
practices include these elements:
| • | We require all third-party contractors and subcontractors who manufacture or finish products for us to comply with our code of conduct relating to supplier working conditions as well as environmental and employment practices. We also require our licensees to ensure that their manufacturers comply with our requirements. |
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| • | Our code of conduct covers employment practices such as wages and benefits, working hours, health and safety, working age and discriminatory practices, environmental matters such as wastewater treatment and solid waste disposal, and ethical and legal conduct. | |
| • | We regularly assess manufacturing and finishing facilities through periodic on-site facility inspections and improvement activities, including use of independent monitors to supplement our internal staff. We integrate review and performance results into our sourcing decisions. |
We disclose the names and locations of our contract
manufacturers to encourage collaboration among apparel companies
in factory monitoring and improvement. We regularly evaluate and
refine our code of conduct processes.
Logistics.
We own and operate dedicated
distribution centers in a number of countries. For more
information, see “Item 2 — Properties.”
Distribution center activities include receiving finished goods
from our contractors and plants, inspecting those products,
preparing them for presentation at retail, and shipping them to
our customers and to our own stores. Our distribution centers
maintain a combination of replenishment and seasonal inventory
from which we ship to our stores and wholesale customers. In
certain locations around the globe we have consolidated our
distribution centers to service multiple countries and brands.
Our inventory significantly builds during peaks in seasonal
shipping periods. We are constantly monitoring our inventory
levels and adjusting them as necessary to meet market demand. In
addition, we outsource some of our logistics activities to
third-party logistics providers.
Competition
The worldwide apparel industry is highly competitive and
fragmented. It is characterized by low barriers to entry, brands
targeted at specific consumer segments, many regional and local
competitors, and an increasing number of global competitors.
Principal competitive factors include:
| • | developing products with relevant fits, finishes, fabrics, style and performance features; | |
| • | maintaining favorable brand recognition and appeal through strong and effective marketing; | |
| • | anticipating and responding to changing consumer demands in a timely manner; | |
| • | providing sufficient retail distribution, visibility and availability, and presenting products effectively at retail; | |
| • | delivering compelling value for the price; and | |
| • | generating competitive economics for wholesale customers, including retailers, franchisees, and distributors. |
We face competition from a broad range of competitors at the
worldwide, regional and local levels in diverse channels across
a wide range of retail price points. Worldwide, a few of our
primary competitors include vertically integrated specialty
stores operated by such companies such as Gap Inc. and Inditex;
jeanswear brands such as those marketed by VF Corporation, a
competitor in multiple channels and product lines including
through their Wrangler, Lee and Seven for All Mankind brands;
and athletic wear companies such as adidas Group and Nike, Inc.
In addition, each region faces local or regional competition,
such as G-Star and Diesel in Europe; Pepe in Spain; Brax in
Germany; UNIQLO in Asia Pacific; Edwin in Japan; Apple/Texwood
in China; and retailers’ private or exclusive labels such
as those from Wal-Mart Stores, Inc. (Faded Glory brand); Target
Corporation (Mossimo and Merona brands); JC Penney (Arizona
brand) and Macy’s (INC. brand) in the Americas. Many of our
regional competitors are also seeking to expand globally through
an expanded store footprint and the
e-commerce
channel. For more information on the factors affecting our
competitive position, see “Item 1A — Risk
Factors.”
Trademarks
We have more than 5,000 trademark registrations and pending
applications in approximately 180 countries worldwide, and we
acquire rights in new trademarks according to business needs.
Substantially all of our global trademarks are owned by Levi
Strauss & Co., the parent and U.S. operating
company. We regard our trademarks as our most valuable assets
and believe they have substantial value in the marketing of our
products. The
Levi’s
®
,
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Dockers
®
and
501
®
trademarks, the Arcuate Stitching Design, the Tab Device, the
Two
Horse
®
Design, the Housemark and the Wings and Anchor Design are among
our core trademarks.
We protect these trademarks by registering them with the
U.S. Patent and Trademark Office and with governmental
agencies in other countries, particularly where our products are
manufactured or sold. We work vigorously to enforce and protect
our trademark rights by engaging in regular market reviews,
helping local law enforcement authorities detect and prosecute
counterfeiters, issuing
cease-and-desist
letters against third parties infringing or denigrating our
trademarks, opposing registration of infringing trademarks, and
initiating litigation as necessary. We currently are pursuing
approximately 540 infringement matters around the world. We also
work with trade groups and industry participants seeking to
strengthen laws relating to the protection of intellectual
property rights in markets around the world.
Employees
As of November 28, 2010, we employed approximately
16,200 people, approximately 8,900 of whom were located in
the Americas, 4,800 in Europe, and 2,500 in Asia Pacific.
Approximately 3,800 of our employees were associated with
manufacturing of our products, 6,700 worked in retail, including
seasonal employees, 1,700 worked in distribution and 4,000 were
other non-production employees.
History
and Corporate Citizenship
Our history and longevity are unique in the apparel industry.
Our commitment to quality, innovation and corporate citizenship
began with our founder, Levi Strauss, who infused the business
with the principle of responsible commercial success that has
been embedded in our business practices throughout our more than
150-year
history. This mixture of history, quality, innovation and
corporate citizenship contributes to the iconic reputations of
our brands.
In 1853, during the California Gold Rush, Mr. Strauss
opened a wholesale dry goods business in San Francisco that
became known as “Levi Strauss & Co.” Seeing
a need for work pants that could hold up under rough conditions,
he and Jacob Davis, a tailor, created the first jean. In 1873,
they received a U.S. patent for “waist overalls”
with metal rivets at points of strain. The first product line
designated by the lot number “501” was created in 1890.
In the 19th and early 20th centuries, our work pants were worn
primarily by cowboys, miners and other working men in the
western United States. Then, in 1934, we introduced our first
jeans for women, and after World War II, our jeans began to
appeal to a wider market. By the 1960s they had become a symbol
of American culture, representing a unique blend of history and
youth. We opened our export and international businesses in the
1950s and 1960s. In 1986, we introduced the
Dockers
®
brand of casual apparel which revolutionized the concept of
business casual.
Throughout this long history, we upheld our strong belief that
we can help shape society through civic engagement and community
involvement, responsible labor and workplace practices,
philanthropy, ethical conduct, environmental stewardship and
transparency. We have engaged in a “profits through
principles” business approach from the earliest years of
the business. Among our milestone initiatives over the years, we
integrated our factories two decades prior to the
U.S. civil rights movement and federally mandated
desegregation, we developed a comprehensive supplier code of
conduct requiring safe and healthy working conditions among our
suppliers (a first of its kind for a multinational apparel
company), and we offered full medical benefits to domestic
partners of employees prior to other companies of our size, a
practice that is widely accepted today.
Our Website —
www.levistrauss.com
—
contains additional and detailed information about our history
and corporate citizenship initiatives. Our Website and the
information contained on our Website are not part of this annual
report and are not incorporated by reference into this annual
report.
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| Item 1A. | RISK FACTORS |
Risks
Relating to the Industry in Which We Compete
Our
revenues are influenced by general economic
conditions.
Apparel is a cyclical industry that is dependent upon the
overall level of consumer spending. Our wholesale customers
anticipate and respond to adverse changes in economic conditions
and uncertainty by reducing inventories and canceling orders.
Our brand-dedicated stores are also affected by these conditions
which may lead to a decline in consumer traffic to, and spending
in, these stores. As a result, factors that diminish consumer
spending and confidence in any of the markets in which we
compete, particularly deterioration in general economic
conditions, high levels and fear of unemployment, increases in
energy costs or interest rates, housing market downturns, fear
about and impact of pandemic illness, and other factors such as
acts of war, acts of nature or terrorist or political events
that impact consumer confidence, could reduce our sales and
adversely affect our business and financial condition through
their impact on our wholesale customers as well as its direct
impact on us. For example, the global financial economic
downturn that began in 2008 continued to impact consumer
confidence and spending negatively. Even when the economy
rebounds we do not anticipate that our wholesale customers will
return to carrying the levels of inventory in our products as
that prior to the downturn. These outcomes and behaviors have
and may continue to adversely affect our business and financial
condition.
Intense
competition in the worldwide apparel industry could lead to
reduced sales and prices.
We face a variety of competitive challenges from jeanswear and
casual apparel marketers, fashion-oriented apparel marketers,
athletic and sportswear marketers, vertically integrated
specialty stores, and retailers of private-label products. Some
of these competitors have greater financial and marketing
resources than we do and may be able to adapt to changes in
consumer preferences or retail requirements more quickly, devote
greater resources to the building and sustaining of their brand
equity and the marketing and sale of their products, or adopt
more aggressive pricing policies than we can. As a result, we
may not be able to compete as effectively with them and may not
be able to maintain or grow the equity of and demand for our
brands. Increased competition in the worldwide apparel
industry — including from the international expansion
and increased
e-commerce
presence of vertically integrated specialty stores, from
department stores, chain stores and mass channel retailers
developing exclusive labels, and from well-known and successful
non-apparel brands (such as athletic wear marketers) expanding
into jeans and casual apparel — could reduce our sales
and adversely affect our business and financial condition.
The
success of our business depends upon our ability to offer
innovative and updated products at attractive price
points.
The worldwide apparel industry is characterized by constant
product innovation due to changing fashion trends and consumer
preferences and by the rapid replication of new products by
competitors. As a result, our success depends in large part on
our ability to develop, market and deliver innovative and
stylish products at a pace, intensity, and price competitive
with other brands in our segments. We must also have the agility
to respond to changes in consumer preference such as the
consumer shift in Japan away from premium-priced brands to
lower-priced fast-fashion products. In addition, we must create
products at a range of price points that appeal to the consumers
of both our wholesale customers and our dedicated retail stores.
Failure on our part to regularly and rapidly develop innovative
and stylish products and update core products could limit sales
growth, adversely affect retail and consumer acceptance of our
products, negatively impact the consumer traffic in our
dedicated retail stores, leave us with a substantial amount of
unsold inventory which we may be forced to sell at discounted
prices, and impair the image of our brands. Moreover, our newer
products may not produce as high a gross margin as our
traditional products and thus may have an adverse effect on our
overall margins and profitability.
The
worldwide apparel industry is subject to ongoing pricing
pressure.
The apparel market is characterized by low barriers to entry for
both suppliers and marketers, global sourcing through suppliers
located throughout the world, trade liberalization, continuing
movement of product sourcing to lower cost countries, and the
ongoing emergence of new competitors with widely varying
strategies and resources.
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These factors as well as the impact of increasing prices of raw
materials, such as cotton which has been subject to significant
price variability in recent months, have contributed, and may
continue to contribute to, ongoing pricing pressure throughout
the supply chain. This pressure has had and may continue to have
the following effects:
| • | require us to introduce lower-priced products or provide new or enhanced products at the same prices; | |
| • | require us to raise wholesale prices on existing products resulting in decreased sales volume; | |
| • | result in reduced gross margins across our product lines; | |
| • | increase retailer demands for allowances, incentives and other forms of economic support; and | |
| • | increase pressure on us to reduce our production costs and our operating expenses. |
Any of these factors could adversely affect our business and
financial condition.
Increases
in the price of raw materials or their reduced availability
could increase our cost of goods and negatively impact our
financial results.
The principal materials used in our business are cotton, blends,
synthetics and wools. The prices we pay our suppliers for our
products are dependent in part on the market price for raw
materials — primarily cotton — used to
produce them. The price and availability of cotton may fluctuate
substantially, depending on a variety of factors, including
demand, acreage devoted to cotton crops and crop yields,
weather, supply conditions, transportation costs, energy prices,
work stoppages, government regulation and government policy,
economic climates, market speculation and other unpredictable
factors. Any and all of these factors may be exacerbated by
global climate change. During the course of the second half of
fiscal year 2010, the price of cotton increased substantially as
a result of various dynamics in the commodity markets.
Fluctuations in the price and availability of raw materials have
not materially affected our cost of goods in recent years, but
continued increases in raw material costs, unless sufficiently
offset with our pricing actions, might cause a decrease in our
profitability; while any related pricing actions might cause a
decline in our sales volume. Moreover, any decrease in the
availability of cotton could impair our ability to meet our
production requirements in a timely manner. Both the increased
cost and lower availability of cotton may also have an adverse
impact on our cash and working capital needs as well as those of
our suppliers.
Our
business is subject to risks associated with sourcing and
manufacturing overseas.
We import both raw materials and finished garments into all of
our operating regions. Our ability to import products in a
timely and cost-effective manner may be affected by conditions
at ports or issues that otherwise affect transportation and
warehousing providers, such as port and shipping capacity, labor
disputes and work stoppages, political unrest, severe weather,
or security requirements in the United States and other
countries. These issues could delay importation of products or
require us to locate alternative ports or warehousing providers
to avoid disruption to our customers. These alternatives may not
be available on short notice or could result in higher
transportation costs, which could have an adverse impact on our
business and financial condition.
Substantially all of our import operations are subject to
customs and tax requirements and to tariffs and quotas set by
governments through mutual agreements or bilateral actions. In
addition, the countries in which our products are manufactured
or imported may from time to time impose additional quotas,
duties, tariffs or other restrictions on our imports or
adversely modify existing restrictions. Adverse changes in these
import costs and restrictions, or our suppliers’ failure to
comply with customs regulations or similar laws, could harm our
business.
Our operations are also subject to the effects of international
trade agreements and regulations such as the North American Free
Trade Agreement, the Dominican-Republic Central America Free
Trade Agreement, the Egypt Qualified Industrial Zone program,
and the activities and regulations of the World Trade
Organization. Although generally these trade agreements have
positive effects on trade liberalization, sourcing flexibility
and cost of goods by reducing or eliminating the duties
and/or
quotas assessed on products manufactured in a particular
country, trade agreements can also impose requirements that
adversely affect our business, such as setting quotas on
products that may be imported from a particular country into our
key markets such as the United States or the European Union.
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Risks
Relating to Our Business
Our
net sales for fiscal year 2010 were below our peak level of
1996, and actions we have taken, and may take in the future, to
address net sales growth and other issues facing our business
may not be successful over the long term.
Our net sales were $7.1 billion in 1996, fell to
$4.1 billion in 2003, and were $4.3 billion in 2010.
We face intense competition, customer financial hardship and
consolidation, increased focus by retailers on private-label
offerings, expansion of and growth in new distribution sales
channels, declining sales of traditional core products and
continuing pressure on both wholesale and retail pricing. Our
ability to successfully compete could be impaired by our debt
and interest payments, which reduces our operating flexibility
and could limit our ability to respond to developments in the
worldwide apparel industry as effectively as competitors that do
not have comparable debt levels. In addition, the strategic,
operations and management changes we have made in recent years
to improve our business and drive future sales growth may not be
successful over the long term.
We
depend on a group of key customers for a significant portion of
our revenues. A significant adverse change in a customer
relationship or in a customer’s performance or financial
position could harm our business and financial
condition.
Net sales to our ten largest customers totaled approximately 33%
and 36% of total net revenues in 2010 and 2009, respectively.
Our largest customer in both 2010 and 2009, Kohl’s
Corporation, accounted for nearly 10% of net revenues in each
year. While we have long-standing relationships with our
wholesale customers, we do not have long-term contracts with
them. As a result, purchases generally occur on an
order-by-order
basis, and the relationship, as well as particular orders, can
generally be terminated by either party at any time. If any
major customer decreases or ceases its purchases from us,
reduces the floor space, assortments, fixtures or advertising
for our products or changes its manner of doing business with us
for any reason, such actions could adversely affect our business
and financial condition.
For example, our wholesale customers are subject to the
fluctuations in general economic cycles and the current global
economic conditions which are impacting consumer spending, and
our customers may also be affected by the credit environment,
which may impact their ability to access the credit necessary to
operate their business. The performance and financial condition
of a wholesale customer may cause us to alter our business terms
or to cease doing business with that customer, which could in
turn adversely affect our own business and financial condition.
In addition, our wholesale customers may change their apparel
strategies or reduce fixture spaces and purchases of brands that
do not meet their strategic requirements, leading to a loss of
sales for our products at those customers.
In addition, the retail industry in the United States has
experienced substantial consolidation in recent years, and
further consolidation may occur. Consolidation in the retail
industry typically results in store closures, centralized
purchasing decisions, increased customer leverage over
suppliers, greater exposure for suppliers to credit risk and an
increased emphasis by retailers on inventory management and
productivity, any of which can, and have, adversely impacted our
net revenues, margins and ability to operate efficiently.
Our
introduction of a new brand creates risks for us and may not be
successful.
In August 2010, we launched the
Denizen
tm
brand in Asia Pacific to reach consumers in the emerging middle
class in developing markets who seek high-quality jeanswear and
other fashion essentials at affordable prices. The product will
continue to roll out through 2011. We face a number of risks
with respect to this new offering. Launching and growing a new
brand involves considerable investment, particularly in the
inventory necessary to meet product launch as well as ongoing
service requirements, and advertising. As a result, we will have
increases in working capital requirements associated with the
new brand and may experience increased operating costs where we
transition from the Signature brand to the
Denizen
tm
brand. The required investments are initially made with limited
information regarding actual consumer acceptance of the brand,
as we are entering into a new business with no history of
performance and no guarantees of a successful response in the
marketplace. Additionally, our relationships with our current
customers may be adversely affected if they react negatively to
our selling the brand
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through a distribution channel other than their own. Any of
these risks could result in decreased sales, additional expenses
and increased working capital requirements, which may adversely
affect our business and financial condition.
We may
be unable to maintain or increase our sales through our primary
distribution channels.
In the United States, chain stores and department stores are the
primary distribution channels for our
Levi’s
®
and
Dockers
®
products, and the mass channel is the primary distribution
channel for Signature products. Outside the United States,
department stores and independent jeanswear retailers have
traditionally been our primary distribution channels.
We may be unable to maintain or increase sales of our products
through these distribution channels for several reasons,
including the following:
| • | The retailers in these channels maintain — and seek to grow — substantial private-label and exclusive offerings as they strive to differentiate the brands and products they offer from those of their competitors. | |
| • | These retailers may also change their apparel strategies and reduce fixture spaces and purchases of brands misaligned with their strategic requirements. | |
| • | Other channels, including vertically integrated specialty stores, account for a substantial portion of jeanswear and casual wear sales. In some of our mature markets, these stores have already placed competitive pressure on our primary distribution channels, and many of these stores are now looking to our developing markets to grow their business. |
Further success by retailer private-labels and vertically
integrated specialty stores may continue to adversely affect the
sales of our products across all channels, as well as the
profitability of our brand-dedicated stores. Additionally, our
ability to secure or maintain retail floor space, market share
and sales in these channels depends on our ability to offer
differentiated products and to increase retailer profitability
on our products, which could have an adverse impact on our
margins.
During
the past several years, we have experienced significant changes
in senior management and our board. The success of our business
depends on our ability to attract and retain qualified and
effective senior management and board leadership.
The composition of our senior management team and the board has
changed significantly in recent years. Recent changes in our
senior management team include the departure of Armin Broger,
who had been Senior Vice President and President, Levi Strauss
Europe, in November 2010, and Jaime Cohen Szulc, Chief Marketing
Officer —
Levi’s
®
,
in August 2010. In addition, on September 21, 2010, we
announced that three members of our management team were
changing their roles to assume global responsibility for all
product, marketing and business operations for the
Levi’s
®
,
Dockers
®
,
and
Denizen
tm
brands. Specifically, Robert L. Hanson was appointed Executive
Vice President and President, Global
Levi’s
®
,
James Calhoun was appointed Executive Vice President and
President, Global
Dockers
®
,
and Aaron Beng-Keong Boey was appointed Executive Vice President
and President, Global
Denizen
tm
.
Our board added two new members in 2010: Fernando Aguirre joined
on October 1, 2010, and Robert A. Eckert on May 10,
2010. Peter A. Georgescu resigned from our board in July, 2010.
In total, half of our current Board joined in 2007 or later.
Collective or individual changes in our senior management group
or board membership could have an adverse effect on our ability
to determine and implement our strategies, which in turn may
adversely affect our business and results of operations.
Increasing
the number of company-operated stores will require us to enhance
our capabilities and increase our expenditures and will
increasingly impact our financial performance.
Although our business is substantially a wholesale business, we
operated 470 retail stores as of November 28, 2010. As part
of our objective to accelerate growth through dedicated retail
stores, we plan to continue to strategically open
company-operated retail stores. The results from our retail
network may be adversely impacted if we do not find ways to
generate sufficient sales from our existing and new
company-operated stores, which may be particularly challenging
in light of the ongoing global economic downturn. Like other
retail operators, we
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regularly assess store performance and as part of that review we
may determine to close or impair the value of underperforming
stores in the future.
Any increase in the number of company-operated stores will
require us to further develop our retailing skills and
capabilities. We will be required to enter into additional
leases, which will cause an increase in our rental expenses and
off-balance sheet rental obligations and our capital
expenditures for retail locations. These commitments may be
costly to terminate, and these investments may be difficult to
recapture if we decide to close stores or change our strategy.
We must also offer a broad product assortment (especially
women’s and tops), appropriately manage retail inventory
levels, install and operate effective retail systems, execute
effective pricing strategies, and integrate our stores into our
overall business mix. Finally, we will need to hire and train
additional qualified employees and incur additional costs to
operate these stores, which will increase our operating
expenses. These factors, including those relating to securing
retail space and management talent, are even more challenging
considering that many of our competitors either have large
company-operated retail operations today or are seeking to
expand substantially their retail presence. If the actions we
are taking to expand our retail network are not successful on a
sustained basis, our margins, results of operations and ability
to grow may be adversely affected.
We
must successfully maintain and/or upgrade our information
technology systems.
We rely on various information technology systems to manage our
operations. We are currently implementing modifications and
upgrades to our systems, including making changes to legacy
systems, replacing legacy systems with successor systems with
new functionality and acquiring new systems with new
functionality. These types of activities subject us to inherent
costs and risks associated with replacing and changing these
systems, including impairment of our ability to fulfill customer
orders, potential disruption of our internal control structure,
substantial capital expenditures, additional administration and
operating expenses, retention of sufficiently skilled personnel
to implement and operate the new systems, demands on management
time, and other risks and costs of delays or difficulties in
transitioning to new systems or of integrating new systems into
our current systems. Our system implementations may not result
in productivity improvements at a level that outweighs the costs
of implementation, or at all. In addition, the implementation of
new technology systems may cause disruptions in our business
operations and have an adverse effect on our business and
operations, if not anticipated and appropriately mitigated.
We
currently rely on contract manufacturing of our products. Our
inability to secure production sources meeting our quality,
cost, working conditions and other requirements, or failures by
our contractors to perform, could harm our sales, service levels
and reputation.
We source approximately 95% of our products from independent
contract manufacturers who purchase fabric and make our products
and may also provide us with design and development services. As
a result, we must locate and secure production capacity. We
depend on independent manufacturers to maintain adequate
financial resources, including access to sufficient credit,
secure a sufficient supply of raw materials, and maintain
sufficient development and manufacturing capacity in an
environment characterized by continuing cost pressure and
demands for product innovation and
speed-to-market.
In addition, we do not have material long-term contracts with
any of our independent manufacturers, and these manufacturers
generally may unilaterally terminate their relationship with us
at any time. Finally, we may experience capability-building and
infrastructure challenges as we expand our sourcing to new
contractors throughout the world.
Our suppliers are subject to the fluctuations in general
economic cycles, and the global economic conditions may impact
their ability to operate their business. They may also be
impacted by the increasing costs of raw materials, labor and
distribution, resulting in demands for less attractive contract
terms or an inability for them to meet our requirements or
conduct their own businesses. The performance and financial
condition of a supplier may cause us to alter our business terms
or to cease doing business with a particular supplier, or change
our sourcing practices generally, which could in turn adversely
affect our own business and financial condition.
Our dependence on contract manufacturing could subject us to
difficulty in obtaining timely delivery of products of
acceptable quality. A contractor’s failure to ship products
to us in a timely manner or to meet our quality standards, or
interference with our ability to receive shipments due to
factors such as port or transportation conditions, could cause
us to miss the delivery date requirements of our customers.
Failing to make timely deliveries
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may cause our customers to cancel orders, refuse to accept
deliveries, impose non-compliance charges, demand reduced
prices, or reduce future orders, any of which could harm our
sales and margins.
We require contractors to meet our standards in terms of working
conditions, environmental protection, security and other matters
before we are willing to place business with them. As such, we
may not be able to obtain the lowest-cost production. In
addition, the labor and business practices of apparel
manufacturers have received increased attention from the media,
non-governmental organizations, consumers and governmental
agencies in recent years. Any failure by our independent
manufacturers to adhere to labor or other laws or appropriate
labor or business practices, and the potential litigation,
negative publicity and political pressure relating to any of
these events, could harm our business and reputation.
We are
a global company with significant revenues coming from our
Europe and Asia Pacific businesses, which exposes us to
political and economic risks as well as the impact of foreign
currency fluctuations.
We generated approximately 42%, 43% and 44% of our net revenues
from our Europe and Asia Pacific businesses in 2010, 2009 and
2008, respectively. A substantial amount of our products came
from sources outside of the country of distribution. As a
result, we are subject to the risks of doing business outside of
the United States, including:
| • | currency fluctuations, which have impacted our results of operations significantly in recent years; | |
| • | changes in tariffs and taxes; | |
| • | regulatory restrictions on repatriating foreign funds back to the United States; | |
| • | less protective foreign laws relating to intellectual property; and | |
| • | political, economic and social instability. |
The functional currency for most of our foreign operations is
the applicable local currency. As a result, fluctuations in
foreign currency exchange rates affect the results of our
operations and the value of our foreign assets and liabilities,
including debt, which in turn may benefit or adversely affect
results of operations and cash flows and the comparability of
period-to-period
results of operations. In addition, we engage in hedging
activities to manage our foreign currency exposures resulting
from certain product sourcing activities, some intercompany
sales, foreign subsidiaries’ royalty payments, earnings
repatriations, net investment in foreign operations and funding
activities. However, our earnings may be subject to volatility
since we do not fully hedge our foreign currency exposures and
we are required to record in income the changes in the market
values of our exposure management instruments that we do not
designate or that do not qualify for hedge accounting treatment.
Changes in the value of the relevant currencies may affect the
cost of certain items required in our operations as the majority
of our sourcing activities are conducted in U.S. Dollars.
Changes in currency exchange rates may also affect the relative
prices at which we and foreign competitors sell products in the
same market. Foreign policies and actions regarding currency
valuation could result in actions by the United States and other
countries to offset the effects of such fluctuations. Recently,
there has been a high level of volatility in foreign currency
exchange rates and that level of volatility may continue and may
adversely impact our business or financial conditions.
Furthermore, due to our global operations, we are subject to
numerous domestic and foreign laws and regulations affecting our
business, such as those related to labor, employment, worker
health and safety, antitrust and competition, environmental
protection, consumer protection, import/export, and
anti-corruption, including but not limited to the Foreign
Corrupt Practices Act which prohibits giving anything of value
intended to influence the awarding of government contracts.
Although we have put into place policies and procedures aimed at
ensuring legal and regulatory compliance, our employees,
subcontractors and agents could take actions that violate these
requirements. Violations of these regulations could subject us
to criminal or civil enforcement actions, any of which could
have a material adverse effect on our business.
As a global company, we are exposed to risks of doing business
in foreign jurisdictions and risks relating to U.S. policy
with respect to companies doing business in foreign
jurisdictions. Legislation or other changes in the U.S. tax
laws could increase our U.S. income tax liability and
adversely affect our after-tax profitability.
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We
have made changes in our logistics operations in recent years
and continue to look for opportunities to increase
efficiencies.
We take actions to optimize our distribution network from time
to time and will continue to seek additional opportunities for
further improvement. Changes in logistics and distribution
activities could result in temporary shipping disruptions and
increased expense as we bring new arrangements to full
operation, which could have an adverse effect on our results of
operations.
Most
of the employees in our production and distribution facilities
are covered by collective bargaining agreements, and any
material job actions could negatively affect our results of
operations.
In North America, most of our distribution employees are covered
by various collective bargaining agreements, and outside North
America, most of our production and distribution employees are
covered by either industry-sponsored
and/or
state-sponsored collective bargaining mechanisms. Any work
stoppages or other job actions by these employees could harm our
business and reputation.
Our
licensees may not comply with our product quality, manufacturing
standards, marketing and other requirements.
We license our trademarks to third parties for manufacturing,
marketing and distribution of various products. While we enter
into comprehensive agreements with our licensees covering
product design, product quality, sourcing, manufacturing,
marketing and other requirements, our licensees may not comply
fully with those agreements. Non-compliance could include
marketing products under our brand names that do not meet our
quality and other requirements or engaging in manufacturing
practices that do not meet our supplier code of conduct. These
activities could harm our brand equity, our reputation and our
business.
Our
success depends on the continued protection of our trademarks
and other proprietary intellectual property
rights.
Our trademarks and other intellectual property rights are
important to our success and competitive position, and the loss
of or inability to enforce trademark and other proprietary
intellectual property rights could harm our business. We devote
substantial resources to the establishment and protection of our
trademark and other proprietary intellectual property rights on
a worldwide basis. Our efforts to establish and protect our
trademark and other proprietary intellectual property rights may
not be adequate to prevent imitation of our products by others
or to prevent others from seeking to block sales of our
products. Unauthorized copying of our products or unauthorized
use of our trademarks or other proprietary rights may not only
erode sales of our products but may also cause significant
damage to our brand names and our ability to effectively
represent ourselves to our customers, contractors, suppliers
and/or
licensees. Moreover, others may seek to assert rights in, or
ownership of, our trademarks and other proprietary intellectual
property, and we may not be able to successfully resolve those
claims. In addition, the laws and enforcement mechanisms of some
foreign countries may not allow us to protect our proprietary
rights to the same extent as we are able to in the United States
and other countries.
We
have substantial liabilities and cash requirements associated
with postretirement benefits, pension and our deferred
compensation plans.
Our postretirement benefits, pension, and our deferred
compensation plans result in substantial liabilities on our
balance sheet. These plans and activities have and will generate
substantial cash requirements for us, and these requirements may
increase beyond our expectations in future years based on
changing market conditions. The difference between plan
obligations and assets, or the funded status of the plans, is a
significant factor in determining the net periodic benefit costs
of our pension plans and the ongoing funding requirements of
those plans. Many variables, such as changes in interest rates,
mortality rates, health care costs, investment returns,
and/or
the
market value of plan assets can affect the funded status of our
defined benefit pension, other postretirement, and
postemployment benefit plans and cause volatility in the net
periodic benefit cost and future funding requirements of the
plans. Our current estimates indicate our future annual funding
requirements may increase to $135 million in 2011. While
actual results may differ from these estimates, the increased
pension expense and related funding may
15
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extend into future years if current market conditions persist.
Plan liabilities may impair our liquidity, have an unfavorable
impact on our ability to obtain financing and place us at a
competitive disadvantage compared to some of our competitors who
do not have such liabilities and cash requirements.
Earthquakes
or other events outside of our control may damage our facilities
or the facilities of third parties on which we
depend.
Our corporate headquarters are located in California near major
geologic faults that have experienced earthquakes in the past.
An earthquake or other natural disaster or the loss of power
caused by power shortages could disrupt operations or impair
critical systems. Any of these disruptions or other events
outside of our control could affect our business negatively,
harming our operating results. In addition, if any of our other
facilities, including our manufacturing, finishing or
distribution facilities or our company-operated or franchised
stores, or the facilities of our suppliers or customers, is
affected by earthquakes, power shortages, floods, monsoons,
terrorism, epidemics or other events outside of our control, our
business could suffer.
Risks
Relating to Our Debt
We
have debt and interest payment requirements at a level that may
restrict our future operations.
As of November 28, 2010, we had approximately
$1.9 billion of debt, of which all but approximately
$108.3 million was unsecured, and we had
$369.0 million of additional borrowing capacity under our
senior secured revolving credit facility. Our credit facility
matures in 2012, at which time our total borrowings outstanding
under the credit facility become due. Our debt requires us to
dedicate a substantial portion of any cash flow from operations
to the payment of interest and principal due under our debt,
which will reduce funds available for other business purposes,
and result in us having lower net income than we would otherwise
have had. It could also have important adverse consequences to
holders of our securities. Our ability to successfully compete
could be impaired by our debt and interest expense; for example,
our debt and interest levels could:
| • | increase our vulnerability to general adverse economic and industry conditions; | |
| • | limit our flexibility in planning for or reacting to changes in our business and industry; | |
| • | place us at a competitive disadvantage compared to some of our competitors that have less debt; and | |
| • | limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes. |
In addition, borrowings under our senior secured revolving
credit facility and our unsecured term loan bear interest at
variable rates of interest. As a result, increases in market
interest rates would require a greater portion of our cash flow
to be used to pay interest, which could further hinder our
operations and affect the trading price of our debt securities.
Our ability to satisfy our obligations and to reduce our total
debt depends on our future operating performance and on
economic, financial, competitive and other factors, many of
which are beyond our control.
The
downturn in the economy and the volatility in the capital
markets could limit our ability to access capital or could
increase our costs of capital.
We experienced a dramatic downturn in the U.S. and global
economy and disruption in the credit markets, which began in
2008. Although we have had continued solid operating cash flow,
any continued or repeated downturn or disruption in the credit
markets may reduce sources of liquidity available to us. We can
provide no assurance that we will continue to meet our capital
requirements from our cash resources, future cash flow and
external sources of financing, particularly if current market or
economic conditions continue or deteriorate further. We manage
cash and cash equivalents in various institutions at levels
beyond FDIC coverage limits, and we purchase investments not
guaranteed by the FDIC. Accordingly, there may be a risk that we
will not recover the full principal of our investments or that
their liquidity may be diminished. We rely on multiple financial
institutions to provide funding pursuant to existing credit
agreements, and those institutions may not be able to meet their
obligations to provide funding in a timely manner, or at all,
when we require it. The cost of or lack of available credit
16
Table of Contents
could impact our ability to develop sufficient liquidity to
maintain or grow our business, which in turn may adversely
affect our business and results of operations.
Restrictions
in our notes indentures, unsecured term loan and senior secured
revolving credit facility may limit our activities, including
dividend payments, share repurchases and
acquisitions.
The indentures relating to our senior unsecured notes, our Euro
notes, our Yen-denominated Eurobonds, our unsecured term loan
and our senior secured revolving credit facility contain
restrictions, including covenants limiting our ability to incur
additional debt, grant liens, make acquisitions and other
investments, prepay specified debt, consolidate, merge or
acquire other businesses, sell assets, pay dividends and other
distributions, repurchase stock, and enter into transactions
with affiliates. These restrictions, in combination with our
leveraged condition, may make it more difficult for us to
successfully execute our business strategy, grow our business or
compete with companies not similarly restricted.
If our
foreign subsidiaries are unable to distribute cash to us when
needed, we may be unable to satisfy our obligations under our
debt securities, which could force us to sell assets or use cash
that we were planning to use elsewhere in our
business.
We conduct our international operations through foreign
subsidiaries, and therefore we depend upon funds from our
foreign subsidiaries for a portion of the funds necessary to
meet our debt service obligations. We only receive the cash that
remains after our foreign subsidiaries satisfy their
obligations. Any agreements our foreign subsidiaries enter into
with other parties, as well as applicable laws and regulations
limiting the right and ability of
non-U.S. subsidiaries
and affiliates to pay dividends and remit cash to affiliated
companies, may restrict the ability of our foreign subsidiaries
to pay dividends or make other distributions to us. If those
subsidiaries are unable to pass on the amount of cash that we
need, we will be unable to make payments on our debt
obligations, which could force us to sell assets or use cash
that we were planning on using elsewhere in our business, which
could hinder our operations and affect the trading price of our
debt securities.
Our
corporate governance structure may result in actions that
conflict with our creditors’ interests as holders of our
debt securities.
All of our common stock is owned by a voting trust described
under “Item 12 — Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.” Four voting trustees have the exclusive ability
to elect and remove directors, amend our by-laws and take other
actions which would normally be within the power of stockholders
of a Delaware corporation. The voting trust is subject to
expiration on April 15, 2011. As a result, the voting
powers currently held by the voting trustees will shift to the
hands of all stockholders and the stockholders will engage in
voting procedures that they have not had available to them in
15 years. This new engagement in stockholder voting
procedures may create distractions for management or the board
which may make it more difficult for us to successfully execute
our business strategy, grow our business or compete with
companies not similarly structured.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
17
Table of Contents
| Item 2. | PROPERTIES |
We conduct manufacturing, distribution and administrative
activities in owned and leased facilities. We operate three
manufacturing-related facilities abroad and ten
distribution-only centers around the world. We have renewal
rights for most of our property leases. We anticipate that we
will be able to extend these leases on terms satisfactory to us
or, if necessary, locate substitute facilities on acceptable
terms. We believe our facilities and equipment are in good
condition and are suitable for our needs. Information about our
key operating properties in use as of November 28, 2010, is
summarized in the following table:
|
Location
|
Primary Use
|
Leased/Owned
|
||
|
Americas
|
||||
|
Hebron, KY
|
Distribution | Owned | ||
|
Canton, MS
|
Distribution | Owned | ||
|
Henderson, NV
|
Distribution | Owned | ||
|
Westlake, TX
|
Data Center | Leased | ||
|
Etobicoke, Canada
|
Distribution | Owned | ||
|
Naucalpan, Mexico
|
Distribution | Leased | ||
|
Cuautitlan, Mexico
|
Distribution | Leased | ||
|
Europe
|
||||
|
Plock, Poland
|
Manufacturing and Finishing | Leased (1) | ||
|
Northhampton, U.K.
|
Distribution | Owned | ||
|
Sabadell, Spain
|
Distribution | Leased | ||
|
Corlu, Turkey
|
Manufacturing, Finishing and Distribution | Owned | ||
|
Asia Pacific
|
||||
|
Adelaide, Australia
|
Distribution | Leased | ||
|
Cape Town, South Africa
|
Manufacturing, Finishing and Distribution | Leased | ||
|
Hiratsuka Kanagawa, Japan
|
Distribution | Owned (2) |
| (1) | Building and improvements are owned but subject to a ground lease. | |
| (2) | Owned by our 84%-owned Japanese subsidiary. |
Our global headquarters and the headquarters of our Americas
region are both located in leased premises in
San Francisco, California. Our Europe and Asia Pacific
headquarters are located in leased premises in Brussels, Belgium
and Singapore, respectively. As of November 28, 2010, we
also leased or owned 104 administrative and sales offices in 40
countries, as well as leased a small number of warehouses in
seven countries. We own or lease several facilities that are no
longer in operation that we are working to sell or sublease.
In addition, as of November 28, 2010, we had
470 company-operated retail and outlet stores in leased
premises in 27 countries. We had 190 stores in the Americas
region, 173 stores in the Europe region and 107 stores in the
Asia Pacific region.
| Item 3. | LEGAL PROCEEDINGS |
In the ordinary course of business, we have various pending
cases involving contractual matters, employee-related matters,
distribution questions, product liability claims, trademark
infringement and other matters. We do not believe there are any
of these pending legal proceedings that will have a material
impact on our financial condition, results of operations or cash
flows.
| Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of our security holders
during the fourth quarter of the fiscal year ended
November 28, 2010.
18
Table of Contents
PART II
| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
All outstanding shares of our common stock are deposited in a
voting trust, a legal arrangement that transfers the voting
power of the shares to a trustee or group of trustees. The four
voting trustees are Miriam L. Haas, Peter E. Haas Jr., Robert D.
Haas and Stephen C. Neal, three of whom are also directors. The
voting trustees have the exclusive ability to elect and remove
directors, amend our by-laws and take certain other actions
which would normally be within the power of stockholders of a
Delaware corporation. Our equity holders, who, as a result of
the voting trust, legally hold “voting trust
certificates,” not stock, retain the right to direct the
trustees on specified mergers and business combinations,
liquidations, sales of substantially all of our assets and
specified amendments to our certificate of incorporation.
The voting trust is subject to expiration on April 15,
2011. As a result, the voting trust certificates will be
replaced by certificates for shares of common stock, and the
voting powers currently held by the voting trustees will shift
to the hands of all stockholders, and the stockholders will
engage in voting procedures directly as voting matters arise.
Our common stock and the voting trust certificates are not
publicly held or traded. All shares and the voting trust
certificates are subject to a stockholders’ agreement. The
agreement, which expires in April 2016, limits the transfer of
shares and certificates to other holders, family members,
specified charities and foundations and back to the Company. The
agreement does not provide for registration rights or other
contractual devices for forcing a public sale of shares or
certificates, or other access to liquidity. The scheduled
expiration date of the stockholders’ agreement is five
years later than that of the voting trust agreement in order to
permit an orderly transition from effective control by the
voting trust trustees to direct control by the stockholders.
As of January 31, 2011, there were 213 record holders of
voting trust certificates. Our shares are not registered on any
national securities exchange, there is no established public
trading market for our shares and none of our shares are
convertible into shares of any other class of stock or other
securities.
We paid cash dividends of $20 million on our common stock
on May 12, 2010, and May 6, 2009. Subsequent to the
fiscal year-end, on December 9, 2010, our board of
directors declared a cash dividend of $20 million. Please
see Note 14 to our audited consolidated financial
statements included in this report for more information. The
Company does not have an annual dividend policy. The Company
will continue to review its ability to pay cash dividends at
least annually, and dividends may be declared at the discretion
of our board of directors depending upon, among other factors,
the tax impact to the dividend recipients, our financial
condition and compliance with the terms of our debt agreements.
Our senior secured revolving credit facility and the indentures
governing our senior unsecured notes limit our ability to pay
dividends. For more detailed information about these
limitations, see Note 6 to our audited consolidated
financial statements included in this report.
We repurchased 2,217 shares of our common stock during the
fourth quarter of the fiscal year ended November 28, 2010,
in connection with the exercise of put rights under our 2006
Equity Incentive Plan. For more detailed information, see
Note 11 to our audited consolidated financial statements
included in this report.
19
Table of Contents
| Item 6. | SELECTED FINANCIAL DATA |
The following table sets forth our selected historical
consolidated financial data which are derived from our
consolidated financial statements for 2010, 2009, 2008, 2007 and
2006. The financial data set forth below should be read in
conjunction with, and are qualified by reference to,
“Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
our audited consolidated financial statements for 2010, 2009 and
2008 and the related notes to those audited consolidated
financial statements, included elsewhere in this report.
|
Year Ended
|
Year Ended
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
November 25,
|
November 26,
|
||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Statements of Income Data:
|
||||||||||||||||||||
|
Net sales
|
$ | 4,325,908 | $ | 4,022,854 | $ | 4,303,075 | $ | 4,266,108 | $ | 4,106,572 | ||||||||||
|
Licensing revenue
|
84,741 | 82,912 | 97,839 | 94,821 | 86,375 | |||||||||||||||
|
Net revenues
|
4,410,649 | 4,105,766 | 4,400,914 | 4,360,929 | 4,192,947 | |||||||||||||||
|
Cost of goods sold
|
2,187,726 | 2,132,361 | 2,261,112 | 2,318,883 | 2,216,562 | |||||||||||||||
|
Gross profit
|
2,222,923 | 1,973,405 | 2,139,802 | 2,042,046 | 1,976,385 | |||||||||||||||
|
Selling, general and administrative expenses
|
1,841,562 | 1,595,317 | 1,614,730 | 1,401,005 | 1,362,726 | |||||||||||||||
|
Operating income
|
381,361 | 378,088 | 525,072 | 641,041 | 613,659 | |||||||||||||||
|
Interest expense
|
(135,823 | ) | (148,718 | ) | (154,086 | ) | (215,715 | ) | (250,637 | ) | ||||||||||
|
Loss on early extinguishment of debt
|
(16,587 | ) | — | (1,417 | ) | (63,838 | ) | (40,278 | ) | |||||||||||
|
Other income (expense), net
|
6,647 | (39,445 | ) | (303 | ) | 15,047 | 24,136 | |||||||||||||
|
Income before taxes
|
235,598 | 189,925 | 369,266 | 376,535 | 346,880 | |||||||||||||||
|
Income tax expense
(benefit)
(1)
|
86,152 | 39,213 | 138,884 | (84,759 | ) | 106,159 | ||||||||||||||
|
Net income
|
149,446 | 150,712 | 230,382 | 461,294 | 240,721 | |||||||||||||||
|
Net loss (income) attributable to noncontrolling interest
|
7,057 | 1,163 | (1,097 | ) | (909 | ) | (1,718 | ) | ||||||||||||
|
Net income attributable to Levi Strauss & Co.
|
$ | 156,503 | $ | 151,875 | $ | 229,285 | $ | 460,385 | $ | 239,003 | ||||||||||
|
Statements of Cash Flow Data:
|
||||||||||||||||||||
|
Net cash flow provided by (used for):
|
||||||||||||||||||||
|
Operating activities
|
$ | 146,274 | $ | 388,783 | $ | 224,809 | $ | 302,271 | $ | 261,880 | ||||||||||
|
Investing activities
|
(181,781 | ) | (233,029 | ) | (26,815 | ) | (107,277 | ) | (69,597 | ) | ||||||||||
|
Financing activities
|
32,313 | (97,155 | ) | (135,460 | ) | (325,534 | ) | (155,228 | ) | |||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 269,726 | $ | 270,804 | $ | 210,812 | $ | 155,914 | $ | 279,501 | ||||||||||
|
Working capital
|
891,607 | 778,888 | 713,644 | 647,256 | 805,976 | |||||||||||||||
|
Total assets
|
3,135,249 | 2,989,381 | 2,776,875 | 2,850,666 | 2,804,065 | |||||||||||||||
|
Total debt, excluding capital leases
|
1,863,146 | 1,852,900 | 1,853,207 | 1,960,406 | 2,217,412 | |||||||||||||||
|
Total capital leases
|
5,355 | 7,365 | 7,806 | 8,177 | 4,694 | |||||||||||||||
|
Total Levi Strauss & Co. stockholders’ deficit
|
(219,609 | ) | (333,119 | ) | (349,517 | ) | (398,029 | ) | (994,047 | ) | ||||||||||
|
Other Financial Data:
|
||||||||||||||||||||
|
Depreciation and amortization
|
$ | 104,896 | $ | 84,603 | $ | 77,983 | $ | 67,514 | $ | 62,249 | ||||||||||
|
Capital expenditures
|
154,632 | 82,938 | 80,350 | 92,519 | 77,080 | |||||||||||||||
|
Dividends paid
|
20,013 | 20,001 | 49,953 | — | — | |||||||||||||||
| (1) | In the fourth quarter of 2007, as a result of improvements in business performance and recent positive developments in an ongoing IRS examination, we reversed valuation allowances against our deferred tax assets for foreign tax credit carryforwards, as we believed that it was more likely than not that these credits will be utilized prior to their expiration. |
20
Table of Contents
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Our
Company
We design and market jeans, casual and dress pants, tops,
jackets, footwear and related accessories for men, women and
children under our
Levi’s
®
,
Dockers
®
,
Signature by Levi Strauss &
Co.
tm
(“Signature”) and
Denizen
tm
brands around the world. We also license our trademarks in many
countries throughout the world for a wide array of products,
including accessories, pants, tops, footwear and other products.
Our business is operated through three geographic regions:
Americas, Europe and Asia Pacific. Our products are sold in
approximately 55,000 retail locations in more than 110
countries. We support our brands through a global
infrastructure, developing, sourcing and marketing our products
around the world. We distribute our
Levi’s
®
and
Dockers
®
products primarily through chain retailers and department stores
in the United States and primarily through department stores,
specialty retailers and nearly 1,800 franchised and other
brand-dedicated stores outside of the United States. We also
distribute our
Levi’s
®
and
Dockers
®
products through 470 company-operated stores located in 27
countries, which collectively generated approximately 15% of our
net revenues in 2010, as compared to 11% in 2009. In addition,
we distribute our
Levi’s
®
and
Dockers
®
products through their respective brand-dedicated online stores
operated by us as well as the online stores of certain of our
key wholesale customers and other third parties. We distribute
products under the Signature brand primarily through mass
channel retailers in the United States and Canada and franchised
stores in Asia Pacific. We currently distribute our
Denizen
tm
products through franchised stores in Asia Pacific.
Our Europe and Asia Pacific businesses, collectively,
contributed approximately 42% of our net revenues and 38% of our
regional operating income in 2010. Sales of
Levi’s
®
brand products represented approximately 81% of our total net
sales in 2010. Pants, including jeans, casual pants and dress
pants, represented approximately 84% of our total units sold in
2010, and men’s products generated approximately 72% of our
total net sales.
Trends
Affecting our Business
We believe the key business and marketplace factors affecting us
include the following:
| • | Continuing pressures in the U.S. and global economy related to the global economic downturn, access to credit, volatility in investment returns, real estate market and employment concerns, and other similar elements that impact consumer discretionary spending, which continues to be weak in many markets, especially in Europe, are creating a challenging retail environment for us and our customers. | |
| • | Wholesaler/retailer dynamics are changing as the wholesale channels face slowed growth prospects as a result of consolidation in the industry and the increasing presence of vertically integrated specialty stores. As a result, many of our customers desire increased returns on their investment with us through increased margins and inventory turns, and they continue to build competitive exclusive or private-label offerings. Many apparel wholesalers, including us, seek to strengthen relationships with customers as a result of these changes in the marketplace through efforts such as investment in new products, marketing programs, fixtures and collaborative planning systems. | |
| • | Many apparel companies that have traditionally relied on wholesale distribution channels have invested in expanding their own retail store distribution network, which has raised competitiveness in the retail market. | |
| • | More competitors are seeking growth globally, thereby raising the competitiveness of the international markets. Some of these competitors are entering into markets where we already have a mature business such as the United States, Japan, Western Europe and Canada, and those new brands provide consumers discretionary purchase alternatives and lower-priced apparel offerings. Opportunities for major brands also are increasing in rapidly growing developing markets such as India, China, Brazil and Russia. |
21
Table of Contents
| • | The increasingly global nature of our business exposes us to earnings volatility resulting from exchange rate fluctuations. | |
| • | Brand and product proliferation continues around the world as we and other companies compete through differentiated brands and products targeted for specific consumers, price-points and retail segments. In addition, the ways of marketing these brands are changing to new mediums, challenging the effectiveness of more mass-market approaches such as television advertising. | |
| • | Competition for resources throughout the supply chain has increased, causing us and other apparel manufacturers to continue to seek alternative sourcing channels and create new efficiencies in our global supply chain. Trends affecting the supply chain include: |
| • | the proliferation of low-cost sourcing alternatives around the world, which enables competitors to attract consumers with a constant flow of competitively-priced new products, resulting in reduced barriers to entry for new competitors. | |
| • | the impact of increasing prices and tightened supply of labor and raw materials, such as cotton, which has contributed, and may continue to contribute, to ongoing pricing pressure throughout the supply chain. In particular, during the second half of 2010, the price of cotton increased substantially as a result of various dynamics in the commodity markets. |
Trends such as these bring additional pressure on us and other
wholesalers and retailers to shorten lead-times, reduce costs
and raise product prices, and both the increased cost and lower
availability of cotton may have an adverse impact on our cash
and working capital needs as well as those of our suppliers. We
have already begun to raise product prices in an attempt to
mitigate the impact of these higher costs. However, further
increases in cotton prices and other costs of production and
distribution could negatively impact financial results.
These factors contribute to a global market environment of
intense competition, constant product innovation and continuing
cost pressure, and combine with the global economic downturn to
create a challenging commercial and economic environment. We
expect these factors to continue into the foreseeable future. In
addition to these industry trends, we will remain focused on our
key strategies and will continue to invest in the business,
including investments in our retail and wholesale network and
our information technology infrastructure, resulting in
increased advertising and promotion expense, capital expenditure
and selling expense. We believe that we will maintain a gross
margin in the high-40s to low-50s.
Our
2010 Results
Our 2010 results reflect net revenue growth and the effects of
the strategic investments we have made to support our long-term
objectives.
| • | Net revenues. Our consolidated net revenues increased by 7% compared to 2009, an increase of 6% on a constant-currency basis, reflecting growth in each of our geographic regions. Increased net revenues driven by our acquisitions in 2009, growth in revenues associated with the Levi’s ® brand, and the expansion of our dedicated store network globally were partially offset by declines in the wholesale channel in certain markets. | |
| • | Operating income. Our operating income increased by $3 million and our operating margin declined as compared to 2009, as the benefits from a higher gross margin and the increase in our net revenues were offset by our continued strategic investments, including the expansion of our dedicated store network as well as advertising and promotion expenses to support the growth of our brands. | |
| • | Cash flows. Cash flows provided by operating activities were $146 million in 2010 as compared to $389 million in 2009. This reflects our planned expenditures in our strategic business initiatives and inventory build in support of our growth. Lower operating cash flows were countered by a decline in required payments on the trademark tranche of our senior secured revolving credit facility and a significant decline in cash used for acquisitions as compared to 2009. |
22
Table of Contents
Our
Objectives
Our key long-term objectives are to strengthen our brands
globally in order to deliver sustainable profitable growth,
continue to generate strong cash flow and reduce our debt.
Critical strategies to achieve these objectives include building
upon our leadership position in the jean and khaki categories
through continued product and marketing innovation, enhancing
relationships with wholesale customers and expanding our
dedicated store network to drive sales growth, capitalizing on
our global footprint to maximize opportunities in targeted
growth markets, and continuously increasing our productivity. We
expect that our execution of these strategies will continue to
result in increased advertising and selling expenses, a lower
operating margin, and high capital expenditures during the 2011
fiscal year.
Financial
Information Presentation
Fiscal year
. Our fiscal year ends on
the last Sunday of November in each year, although the fiscal
years of certain foreign subsidiaries are fixed at November 30
due to local statutory requirements. Apart from these
subsidiaries, each quarter of fiscal years 2010, 2009 and 2008
consisted of 13 weeks, with the exception of the fourth
quarter of 2008, which consisted of 14 weeks.
Segments
. We manage our business
according to three regional segments: the Americas, Europe and
Asia Pacific. In the first quarter of 2010, accountability for
information technology and marketing staff costs of a global
nature, that in prior years were captured in our geographic
regions, was centralized under corporate management in
conjunction with our key strategy of driving productivity.
Beginning in 2010, these costs have been classified as corporate
expenses. These costs were not significant to any of our
regional segments individually in any of the periods presented
herein, and accordingly, business segment information for prior
years has not been revised. The September 2010 announcement of
our brand-led organization focuses on creating a leadership
structure to enable a consistent product and consumer experience
around the world for each of our brands. We continue to measure
our business performance by region.
Classification
. Our classification of
certain significant revenues and expenses reflects the following:
| • | Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives. | |
| • | Licensing revenue consists of royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products. | |
| • | Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense. | |
| • | Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commission payments associated with our company-operated shop-in-shops. | |
| • | We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network. |
Our gross margins may not be comparable to those of other
companies in our industry since some companies may include costs
related to their distribution network and occupancy costs
associated with company-operated stores in cost of goods sold.
Constant currency
. Constant-currency
comparisons are based on translating local currency amounts in
both periods at the foreign exchange rates used in the
Company’s internal planning process for the current year.
We routinely evaluate our financial performance on a
constant-currency basis in order to facilitate
period-to-period
comparisons without regard to the impact of changing foreign
currency exchange rates.
23
Table of Contents
Results
of Operations
2010
compared to 2009
The following table summarizes, for the periods indicated, the
consolidated statements of income, the changes in these items
from period to period and these items expressed as a percentage
of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 28,
|
November 29,
|
|||||||||||||||||||
|
%
|
2010
|
2009
|
||||||||||||||||||
|
November 28,
|
November 29,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2010 | 2009 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Net sales
|
$ | 4,325.9 | $ | 4,022.9 | 7.5 | % | 98.1 | % | 98.0 | % | ||||||||||
|
Licensing revenue
|
84.7 | 82.9 | 2.2 | % | 1.9 | % | 2.0 | % | ||||||||||||
|
Net revenues
|
4,410.6 | 4,105.8 | 7.4 | % | 100.0 | % | 100.0 | % | ||||||||||||
|
Cost of goods sold
|
2,187.7 | 2,132.4 | 2.6 | % | 49.6 | % | 51.9 | % | ||||||||||||
|
Gross profit
|
2,222.9 | 1,973.4 | 12.6 | % | 50.4 | % | 48.1 | % | ||||||||||||
|
Selling, general and administrative expenses
|
1,841.5 | 1,595.3 | 15.4 | % | 41.8 | % | 38.9 | % | ||||||||||||
|
Operating income
|
381.4 | 378.1 | 0.9 | % | 8.6 | % | 9.2 | % | ||||||||||||
|
Interest expense
|
(135.8 | ) | (148.7 | ) | (8.7 | )% | (3.1 | )% | (3.6 | )% | ||||||||||
|
Loss on early extinguishment of debt
|
(16.6 | ) | — | — | (0.4 | )% | — | |||||||||||||
|
Other income (expense), net
|
6.6 | (39.5 | ) | (116.9 | )% | 0.2 | % | (1.0 | )% | |||||||||||
|
Income before income taxes
|
235.6 | 189.9 | 24.0 | % | 5.3 | % | 4.6 | % | ||||||||||||
|
Income tax expense
|
86.2 | 39.2 | 119.7 | % | 2.0 | % | 1.0 | % | ||||||||||||
|
Net income
|
149.4 | 150.7 | (0.8 | )% | 3.4 | % | 3.7 | % | ||||||||||||
|
Net loss attributable to noncontrolling
|
||||||||||||||||||||
|
interest
|
7.1 | 1.2 | 506.8 | % | 0.2 | % | — | |||||||||||||
|
Net income attributable to Levi
|
||||||||||||||||||||
|
Strauss & Co.
|
$ | 156.5 | $ | 151.9 | 3.0 | % | 3.5 | % | 3.7 | % | ||||||||||
Net
revenues
The following table presents net revenues by reporting segment
for the periods indicated and the changes in net revenues by
reporting segment on both reported and constant-currency bases
from period to period:
| Year Ended | ||||||||||||||||
| % Increase (Decrease) | ||||||||||||||||
|
November 28,
|
November 29,
|
As
|
Constant
|
|||||||||||||
| 2010 | 2009 | Reported | Currency | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Net revenues:
|
||||||||||||||||
|
Americas
|
$ | 2,549.1 | $ | 2,357.7 | 8.1 | % | 7.1 | % | ||||||||
|
Europe
|
1,105.2 | 1,042.1 | 6.1 | % | 7.5 | % | ||||||||||
|
Asia Pacific
|
756.3 | 706.0 | 7.1 | % | 0.3 | % | ||||||||||
|
Total Net Revenues
|
$ | 4,410.6 | $ | 4,105.8 | 7.4 | % | 6.0 | % | ||||||||
Total net revenues increased on both reported and
constant-currency bases for the year ended November 28,
2010, as compared to the prior year. Changes in foreign currency
exchange rates affected our consolidated reported amounts
favorably by approximately $53 million.
24
Table of Contents
Americas
. On both reported and
constant-currency bases, net revenues in our Americas region
increased in 2010. Currency affected net revenues favorably by
approximately $23 million.
Levi’s
®
brand net revenues increased, driven by the outlet stores we
acquired in July 2009, as well as strong performance of our
men’s and juniors’ products in the wholesale channel.
The improved
Levi’s
®
brand performance was partially offset by declines of net sales
from our Signature and
U.S. Dockers
®
brands as compared to 2009, although for the fourth quarter,
Dockers
®
brand net sales increased as compared to the prior year,
primarily driven by men’s long bottoms.
Europe
. Net revenues in our Europe
region increased on both reported and constant-currency bases.
Currency affected net revenues unfavorably by approximately
$18 million.
The increase was driven by the positive impact of our
Levi’s
®
brand, including our 2009 footwear and accessories business
acquisition and our expanding company-operated retail network
throughout the region, and was partially offset by continued
sales declines in our traditional wholesale channels, reflecting
the region’s ongoing depressed economic environment.
Asia Pacific
. Net revenues in Asia
Pacific increased on both reported and constant-currency bases.
Currency affected net revenues favorably by approximately
$48 million.
Net revenues in the region increased primarily due to the
continued expansion of our brand-dedicated retail network in our
emerging markets of China and India, offset by continued net
revenue declines due to the weak performance of our business in
Japan.
Gross
profit
The following table shows consolidated gross profit and gross
margin for the periods indicated and the changes in these items
from period to period:
| Year Ended | ||||||||||||
|
%
|
||||||||||||
|
November 28,
|
November 29,
|
Increase
|
||||||||||
| 2010 | 2009 | (Decrease) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Net revenues
|
$ | 4,410.6 | $ | 4,105.8 | 7.4 | % | ||||||
|
Cost of goods sold
|
2,187.7 | 2,132.4 | 2.6 | % | ||||||||
|
Gross profit
|
$ | 2,222.9 | $ | 1,973.4 | 12.6 | % | ||||||
|
Gross margin
|
50.4 | % | 48.1 | % | ||||||||
Compared to the prior year, gross profit increased in 2010
primarily due to the increase in our constant-currency net
revenues, improved gross margins in each of our regions, and a
favorable currency impact of approximately $47 million. The
improvement in our gross margin primarily reflected the
increased contribution from our company-operated retail network,
which generally has a higher gross margin than our wholesale
business.
25
Table of Contents
Selling,
general and administrative expenses
The following table shows our selling, general and
administrative expenses (“SG&A”) for the periods
indicated, the changes in these items from period to period and
these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 28,
|
November 29,
|
|||||||||||||||||||
|
%
|
2010
|
2009
|
||||||||||||||||||
|
November 28,
|
November 29,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2010 | 2009 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Selling
|
$ | 636.8 | $ | 498.9 | 27.7 | % | 14.4 | % | 12.1 | % | ||||||||||
|
Advertising and promotion
|
327.8 | 266.1 | 23.2 | % | 7.4 | % | 6.5 | % | ||||||||||||
|
Administration
|
403.7 | 371.8 | 8.6 | % | 9.2 | % | 9.1 | % | ||||||||||||
|
Other
|
473.2 | 458.5 | 3.2 | % | 10.7 | % | 11.2 | % | ||||||||||||
|
Total SG&A
|
$ | 1,841.5 | $ | 1,595.3 | 15.4 | % | 41.8 | % | 38.9 | % | ||||||||||
Currency contributed approximately $12 million of the
$246.2 million increase in SG&A expenses as compared
to the prior year.
Selling
. Selling expenses increased
across all business segments, primarily reflecting higher costs,
such as rents and increased headcount, associated with the
continued expansion of our company-operated store network.
Advertising and promotion
. The increase
in advertising and promotion expenses was attributable to the
planned increase in support of our
U.S. Levi’s
®
and
U.S. Dockers
®
brands, as well as our global launch of our
Levi’s
®
Curve ID jeans for women and the launch of our
Denizen
tm
brand in the Asia Pacific region.
Administration
. The increase in
administration expenses reflect higher costs associated with our
pension and postretirement benefit plans, as well as higher
costs related to various corporate initiatives, including costs
in the third quarter of 2010 associated with executive
separations.
Other
. Other SG&A expenses include
distribution, information technology, and marketing organization
costs. The increase in expenses was primarily due to increased
marketing project costs related to our strategic initiatives.
26
Table of Contents
Operating
income
The following table shows operating income by reporting segment
and certain components of corporate expense for the periods
indicated, the changes in these items from period to period and
these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 28,
|
November 29,
|
|||||||||||||||||||
|
%
|
2010
|
2009
|
||||||||||||||||||
|
November 28
|
November 29
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2010 | 2009 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Operating income:
|
||||||||||||||||||||
|
Americas
|
$ | 402.5 | $ | 346.3 | 16.2 | % | 15.8 | % | 14.7 | % | ||||||||||
|
Europe
|
163.5 | 154.8 | 5.6 | % | 14.8 | % | 14.9 | % | ||||||||||||
|
Asia Pacific
|
86.3 | 91.0 | (5.2 | )% | 11.4 | % | 12.9 | % | ||||||||||||
|
Total regional operating income
|
652.3 | 592.1 | 10.2 | % | 14.8 | %* | 14.4 | %* | ||||||||||||
|
Corporate expenses
|
270.9 | 214.0 | 26.6 | % | 6.1 | %* | 5.2 | %* | ||||||||||||
|
Total operating income
|
$ | 381.4 | $ | 378.1 | 0.9 | % | 8.6 | %* | 9.2 | %* | ||||||||||
|
Operating margin
|
8.6 | % | 9.2 | % | ||||||||||||||||
| * | Percentage of consolidated net revenues |
Currency favorably affected total operating income by
approximately $35 million in 2010.
Regional operating income
.
| • | Americas. Operating income and operating margin reflected the region’s improvement in gross margin and higher constant-currency net revenues, the effects of which were partially offset by the increased selling and advertising expenses. | |
| • | Europe. The increase in the region’s operating income was primarily due to the favorable impact of currency. The region’s higher constant-currency net revenues and gross margin improvement were more than offset by higher expenses reflecting our retail expansion. | |
| • | Asia Pacific. Despite the favorable impact of currency and improved gross margin, the region’s operating income decreased due to the net sales declines in Japan as well as the region’s retail expansion and increased advertising. |
Corporate
. Corporate expenses are
selling, general and administrative expenses that are not
attributed to any of our regional operating segments. Corporate
expenses for 2010 increased due to higher costs associated with
our pension and postretirement benefit plans and higher costs
related to various corporate initiatives, including costs in the
third quarter of 2010 associated with executive separations, as
well as the increased marketing costs. Corporate expenses also
increased due to the classification of information technology
and marketing staff costs of a global nature that were
centralized under corporate management beginning in 2010; these
costs were not significant to any of our regional segments
individually or to prior periods, and as such, prior period
amounts were not reclassified.
Corporate expenses in 2010 and 2009 include amortization of
prior service benefit of $29.6 million and
$39.7 million, respectively, related to postretirement
benefit plan amendments in 2004 and 2003. We will continue to
amortize the prior service benefit in the future. For more
information, see Note 8 to our audited consolidated
financial statements included in this report.
Interest
expense
Interest expense was $135.8 million for the year ended
November 28, 2010, as compared to $148.7 million in
the prior year. The decrease in interest expense was driven
primarily by lower average borrowing rates in 2010, resulting
from our debt refinancing activity that occurred in the second
quarter of 2010, and lower interest expense on our deferred
compensation plans in 2010.
27
Table of Contents
The weighted-average interest rate on average borrowings
outstanding for 2010 was 7.05% as compared to 7.44% for 2009.
Loss
on early extinguishment of debt
For the year ended November 28, 2010, we recorded a
$16.6 million loss on early extinguishment of debt as a
result of our debt refinancing activities during the second
quarter of 2010. The loss was comprised of tender premiums of
$30.2 million and the write-off of $7.6 million of
unamortized debt issuance costs net of applicable premium,
offset by a gain of $21.2 million related to the partial
repurchase of Yen-denominated Eurobonds due 2016 at a discount
to their par value.
Other
income (expense), net
Other income (expense), net, primarily consists of foreign
exchange management activities and transactions. For the year
ended November 28, 2010, we recorded net income of
$6.6 million compared to net expense of $39.5 million
for the prior year.
The income in 2010 primarily reflects transaction gains on our
foreign currency denominated balances, partially offset by
losses on foreign exchange derivatives which economically hedge
future cash flow obligations of our foreign operations. The
expense in 2009 reflected losses on foreign exchange derivatives.
Income
tax expense
Income tax expense was $86.2 million for the year ended
November 28, 2010, compared to $39.2 million for the
prior year. Our effective tax rate was 36.6% for the year ended
November 28, 2010, compared to 20.6% for the prior year.
The 16.0 percentage point increase in our effective tax
rate was primarily driven by two significant discrete income tax
charges recognized during the second quarter of 2010, as well as
our inability to benefit current year losses in our Japanese
subsidiary. The $47.0 million increase in our income tax
expense was primarily attributed to the same factors coupled
with an increase in income before income taxes.
Due primarily to our recent negative financial performance in
Japan, we recognized a discrete expense of $14.2 million
during the second quarter of 2010 to recognize a valuation
allowance to fully offset the amount of the existing net
deferred tax assets of our Japanese subsidiary as of the
beginning of our fiscal year 2010, as we no longer expect to
benefit from those assets. Furthermore, in 2010 we were not able
to benefit our current year losses in Japan, which further
increased the valuation allowance by $13.3 million.
Additionally, we recognized an expense of $14.0 million in
the second quarter of 2010 due to the enactment in March 2010 of
the Patient Protection and Affordable Care Act, which includes a
provision eliminating, beginning in our tax year 2014, the tax
deductibility of the costs of providing Medicare
Part D-equivalent
prescription drug benefits to retirees to the extent of the
Federal subsidy received.
28
Table of Contents
2009
compared to 2008
The following table summarizes, for the periods indicated, the
consolidated statements of income, the changes in these items
from period to period and these items expressed as a percentage
of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 29,
|
November 30,
|
|||||||||||||||||||
|
%
|
2009
|
2008
|
||||||||||||||||||
|
November 29,
|
November 30,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2009 | 2008 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Net sales
|
$ | 4,022.9 | $ | 4,303.1 | (6.5 | )% | 98.0 | % | 97.8 | % | ||||||||||
|
Licensing revenue
|
82.9 | 97.8 | (15.3 | )% | 2.0 | % | 2.2 | % | ||||||||||||
|
Net revenues
|
4,105.8 | 4,400.9 | (6.7 | )% | 100.0 | % | 100.0 | % | ||||||||||||
|
Cost of goods sold
|
2,132.4 | 2,261.1 | (5.7 | )% | 51.9 | % | 51.4 | % | ||||||||||||
|
Gross profit
|
1,973.4 | 2,139.8 | (7.8 | )% | 48.1 | % | 48.6 | % | ||||||||||||
|
Selling, general and administrative expenses
|
1,595.3 | 1,614.7 | (1.2 | )% | 38.9 | % | 36.7 | % | ||||||||||||
|
Operating income
|
378.1 | 525.1 | (28.0 | )% | 9.2 | % | 11.9 | % | ||||||||||||
|
Interest expense
|
(148.7 | ) | (154.1 | ) | (3.5 | )% | (3.6 | )% | (3.5 | )% | ||||||||||
|
Loss on early extinguishment of debt
|
— | (1.4 | ) | (100.0 | )% | — | — | |||||||||||||
|
Other expense, net
|
(39.5 | ) | (0.3 | ) | 12,918.2 | % | (1.0 | )% | — | |||||||||||
|
Income before income taxes
|
189.9 | 369.3 | (48.6 | )% | 4.6 | % | 8.4 | % | ||||||||||||
|
Income tax expense
|
39.2 | 138.9 | (71.8 | )% | 1.0 | % | 3.2 | % | ||||||||||||
|
Net income
|
150.7 | 230.4 | (34.6 | )% | 3.7 | % | 5.2 | % | ||||||||||||
|
Net loss (income) attributable to noncontrolling interest
|
1.2 | (1.1 | ) | (206.0 | )% | — | — | |||||||||||||
|
Net income attributable to Levi Strauss & Co.
|
$ | 151.9 | $ | 229.3 | (33.8 | )% | 3.7 | % | 5.2 | % | ||||||||||
Net
revenues
The following table presents net revenues by reporting segment
for the periods indicated and the changes in net revenues by
reporting segment on both reported and constant-currency bases
from period to period:
| Year Ended | ||||||||||||||||
| % Increase (Decrease) | ||||||||||||||||
|
November 29,
|
November 30,
|
As
|
Constant
|
|||||||||||||
|
2009
|
2008 | Reported | Currency | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Net revenues:
|
||||||||||||||||
|
Americas
|
$ | 2,357.7 | $ | 2,476.4 | (4.8 | )% | (3.2 | )% | ||||||||
|
Europe
|
1,042.1 | 1,195.6 | (12.8 | )% | (3.3 | )% | ||||||||||
|
Asia Pacific
|
706.0 | 728.9 | (3.2 | )% | (0.9 | )% | ||||||||||
|
Total net revenues
|
$ | 4,105.8 | $ | 4,400.9 | (6.7 | )% | (2.9 | )% | ||||||||
Total net revenues decreased on both reported and
constant-currency bases for the year ended November 29,
2009, as compared to the prior year. Reported amounts were
affected unfavorably by changes in foreign currency exchange
rates across all regions, particularly in Europe.
Americas
. On both reported and
constant-currency bases, net revenues in our Americas region
decreased in 2009. Currency affected net revenues unfavorably by
approximately $39 million.
29
Table of Contents
Net revenues decreased due to the weak economic environment,
lower demand for our
U.S. Dockers
®
brand products, and lower sales of Signature products. These
declines were partially offset by increased
Levi’s
®
brand revenues driven by strong performance of our men’s
and boy’s products and growth in the Juniors business in
our wholesale channel, and increased revenues from our retail
network from our July 13, 2009, acquisition of the
operating rights to 73
Levi’s
®
and
Dockers
®
outlet stores from Anchor Blue Retail Group, Inc.
As compared to prior year, 2009 also reflects the loss of
customers due to bankruptcy in the second and third quarters of
2008. In addition, 2008 was adversely impacted by issues we
encountered during our stabilization of an enterprise resource
planning (“ERP”) system in the United States in the
beginning of the second quarter of 2008.
Europe
.
Net revenues in Europe
decreased on both reported and constant-currency bases. Currency
affected net revenues unfavorably by approximately
$118 million.
The region’s depressed retail environment drove net revenue
declines across most markets, primarily due to lower sales in
our wholesale channels. This was partially offset by the impact
of our business acquisitions and our expanding company-operated
retail network throughout the region.
Asia Pacific
. Net revenues in Asia
Pacific decreased on both reported and constant-currency bases.
Currency affected net revenues unfavorably by approximately
$17 million.
Net revenues in the region decreased primarily due to lower
sales in Japan. These declines were offset by strong performance
in most other markets in the region, driven by product
promotions and the continued expansion of our brand-dedicated
store network.
Gross
profit
The following table shows consolidated gross profit and gross
margin for the periods indicated and the changes in these items
from period to period:
| Year Ended | ||||||||||||
|
%
|
||||||||||||
|
November 29,
|
November 30,
|
Increase
|
||||||||||
|
2009
|
2008 | (Decrease) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Net revenues
|
$ | 4,105.8 | $ | 4,400.9 | (6.7 | )% | ||||||
|
Cost of goods sold
|
2,132.4 | 2,261.1 | (5.7 | )% | ||||||||
|
Gross profit
|
$ | 1,973.4 | $ | 2,139.8 | (7.8 | )% | ||||||
|
Gross margin
|
48.1 | % | 48.6 | % | ||||||||
Compared to the prior year, gross profit declined in 2009
primarily due to the unfavorable impact of currency across all
regions, which totaled approximately $128 million.
Excluding the effects of currency, the impact of our lower net
revenues to gross profit was partially offset by a slight
improvement in gross margin, primarily driven by our Americas
region, due to the strong performance of the
Levi’s
®
brand, and the increased contribution from our company-operated
retail network, which has a higher gross margin than our
wholesale business.
30
Table of Contents
Selling,
general and administrative expenses
The following table shows our selling, general and
administrative expenses (“SG&A”) for the periods
indicated, the changes in these items from period to period and
these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 29,
|
November 30,
|
|||||||||||||||||||
|
%
|
2009
|
2008
|
||||||||||||||||||
|
November 29,
|
November 30,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2009 | 2008 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Selling
|
$ | 498.9 | $ | 438.9 | 13.6 | % | 12.1 | % | 10.0 | % | ||||||||||
|
Advertising and promotion
|
266.1 | 297.9 | (10.6 | )% | 6.5 | % | 6.8 | % | ||||||||||||
|
Administration
|
371.8 | 372.5 | (0.2 | )% | 9.1 | % | 8.5 | % | ||||||||||||
|
Other
|
458.5 | 505.4 | (9.3 | )% | 11.2 | % | 11.5 | % | ||||||||||||
|
Total SG&A
|
$ | 1,595.3 | $ | 1,614.7 | (1.2 | )% | 38.9 | % | 36.7 | % | ||||||||||
Compared to the prior year, total SG&A expenses declined in
2009 due to a favorable currency impact of approximately
$62 million.
Selling
. Selling expenses increased
across all business segments, primarily reflecting additional
company-operated stores, partially offset by a favorable
currency impact of $25 million in 2009.
Advertising and promotion
. The decrease
in advertising and promotion expenses was attributable to the
effects of currency and planned reduction of our advertising
activities in most markets as compared to the prior year.
Administration
. Administration expenses
include corporate expenses and other administrative charges.
Currency favorably impacted these expenses by $13 million
in 2009. Reflected in 2009 are increased pension expense of
approximately $38 million and costs associated with our
business acquisitions during the year, while 2008 included
higher costs associated with our conversion to an ERP system in
the United States as well as various other corporate initiatives.
Other
. Other SG&A costs include
distribution, information technology, and marketing organization
costs
,
gain or loss on sale of assets and other operating
income. Currency favorably impacted these expenses by
$14 million in 2009. The decrease in expenses was primarily
due to lower distribution costs, resulting from actions we have
taken in recent years to restructure our distribution center
operations and the decline in sales volume, as well as lower
marketing organization costs.
31
Table of Contents
Operating
income
The following table shows operating income by reporting segment
and certain components of corporate expense for the periods
indicated, the changes in these items from period to period and
these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 29,
|
November 30,
|
|||||||||||||||||||
|
%
|
2009
|
2008
|
||||||||||||||||||
|
November 29,
|
November 30,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2009 | 2008 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Operating income:
|
||||||||||||||||||||
|
Americas
|
$ | 346.3 | $ | 346.9 | (0.2 | )% | 14.7 | % | 14.0 | % | ||||||||||
|
Europe
|
154.8 | 257.9 | (40.0 | )% | 14.9 | % | 21.6 | % | ||||||||||||
|
Asia Pacific
|
91.0 | 99.5 | (8.6 | )% | 12.9 | % | 13.7 | % | ||||||||||||
|
Total regional operating income
|
592.1 | 704.3 | (15.9 | )% | 14.4 | %* | 16.0 | %* | ||||||||||||
|
Corporate expenses
|
214.0 | 179.2 | 19.4 | % | 5.2 | %* | 4.1 | %* | ||||||||||||
|
Total operating income
|
$ | 378.1 | $ | 525.1 | (28.0 | )% | 9.2 | %* | 11.9 | %* | ||||||||||
|
Operating margin
|
9.2 | % | 11.9 | % | ||||||||||||||||
| * | Percentage of consolidated net revenues |
Currency unfavorably affected operating income by approximately
$66 million in 2009.
Regional
operating
income
.
| • | Americas. Operating income decreased due to the unfavorable impact of currency. Excluding currency, operating income increased due to an improved operating margin, driven by the improved gross margin and lower SG&A expenses in the region. | |
| • | Europe. The decrease in the region’s operating income was due to the unfavorable impact of currency, as well as a decline in operating margin. The decline in operating margin is due to the sales decline in our wholesale channel and higher expenses from our retail network, which reflects our increasing investment in company-operated store expansion and acquisitions in 2009. | |
| • | Asia Pacific. Operating income decreased due to the unfavorable impact of currency, as the decline in Japan’s operating income was substantially offset by the revenue growth and lower SG&A expenses in most other markets in the region. |
Corporate
. Corporate expense is
comprised of net restructuring charges and other corporate
expenses, including corporate staff costs. Corporate expenses in
2009 reflect the higher pension expense, resulting from the
decline in the fair value of our pension plan assets in 2008,
higher severance costs for headcount reductions, and increased
incentive compensation accruals, relating to greater achievement
against our internally-set objectives. These increases were
partially offset by a decline in corporate staff costs in 2009,
reflecting our cost-cutting initiatives.
Corporate expenses in 2009 and 2008 include amortization of
prior service benefit of $39.7 million and
$41.4 million, respectively, related to postretirement
benefit plan amendments in 2004 and 2003. We will continue to
amortize the prior service benefit in the future; however, it
will decline in 2010 by approximately $10 million, in
relation to the expected service lives of the employees affected
by these plan changes. We also expect the higher pension
expenses to continue in 2010, despite a recovery in asset
values, as changes in the financial markets during 2009,
including a decrease in corporate bond yield indices, drove a
reduction in the discount rates used to measure our benefit
obligations. Higher pension expense may potentially extend into
future periods should market conditions persist. For more
information, see Note 8 to our audited consolidated
financial statements included in this report.
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Interest
expense
Interest expense was $148.7 million for the year ended
November 29, 2009, as compared to $154.1 million in
the prior year. Lower average borrowing rates and lower debt
levels in 2009, resulting primarily from our required payments
on the trademark tranche of our senior secured revolving credit
facility, caused the decrease.
The weighted-average interest rate on average borrowings
outstanding for 2009 was 7.44% as compared to 8.09% for 2008.
Other
expense, net
Other expense, net, primarily consists of foreign exchange
management activities and transactions. For the year ended
November 29, 2009, we recorded net expense of
$39.5 million compared to $0.3 million for the prior
year. The increase in expense primarily reflects losses in 2009
on foreign exchange derivatives which economically hedge future
cash flow obligations of our foreign operations, partially
offset by foreign currency transaction gains. During 2009, the
U.S. Dollar depreciated relative to the rate included in
many of our forward contracts, particularly the Euro and the
Australian Dollar, negatively impacting the value of the related
derivatives.
Income
tax expense
Income tax expense was $39.2 million for the year ended
November 29, 2009, compared to $138.9 million for the
prior year. Our effective tax rate was 20.6% for the year ended
November 29, 2009, compared to 37.6% for the prior year.
The decrease in income tax expense and effective tax rate was
primarily driven by the reduction in income before income taxes
and a $33.2 million tax benefit relating to the expected
reversal of basis differences, consisting primarily of
undistributed earnings in investments in certain foreign
subsidiaries. During the fourth quarter of 2009, we adopted
specific plans to remit the prior undistributed earnings of
certain foreign subsidiaries, which were previously considered
permanently reinvested. As a result of the planned distribution,
we recognized a deferred tax asset and a corresponding tax
benefit of $33.2 million, for the foreign tax credits in
excess of the associated U.S. income tax liability that are
expected to become available upon the planned distribution.
Liquidity
and Capital Resources
Liquidity
outlook
We believe we will have adequate liquidity over the next twelve
months to operate our business and to meet our cash requirements.
Cash
sources
We are a privately-held corporation. We have historically relied
primarily on cash flows from operations, borrowings under credit
facilities, issuances of notes and other forms of debt
financing. We regularly explore financing and debt reduction
alternatives, including new credit agreements, unsecured and
secured note issuances, equity financing, equipment and real
estate financing, securitizations and asset sales. Key sources
of cash include earnings from operations and borrowing
availability under our revolving credit facility.
We are borrowers under an amended and restated senior secured
revolving credit facility. The maximum availability under the
facility is $750 million secured by certain of our domestic
assets and certain U.S. trademarks associated with the
Levi’s
®
brand and other related intellectual property. The facility
includes a $250 million trademark tranche and a
$500 million revolving tranche. The revolving tranche
increases as the trademark tranche is repaid, up to a maximum of
$750 million when the trademark tranche is repaid in full.
Upon repayment of the trademark tranche, the secured interest in
the U.S. trademarks will be released. As of
November 28, 2010, we had borrowings of $108.3 million
under the trademark tranche and no outstanding borrowings under
the revolving tranche. Unused availability under the revolving
tranche was $369.0 million, as our total availability of
$445.5 million, based on collateral levels as defined by
the agreement, was reduced by $76.5 million of other
credit-related instruments.
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Under the facility, we are required to meet a fixed charge
coverage ratio as defined in the agreement of 1.0:1.0 when
unused availability is less than $100 million. This
covenant will be discontinued upon the repayment in full and
termination of the trademark tranche described above and with
the implementation of an unfunded availability reserve of
$50 million, which implementation will reduce availability
under our credit facility.
As of November 28, 2010, we had cash and cash equivalents
totaling $269.7 million, resulting in a net liquidity
position (unused availability and cash and cash equivalents) of
$638.7 million.
Cash
uses
Our principal cash requirements include working capital, capital
expenditures, payments of principal and interest on our debt,
payments of taxes, contributions to our pension plans and
payments for postretirement health benefit plans, and, if market
conditions warrant, occasional investments in, or acquisitions
of, business ventures in our line of business. In addition, we
regularly evaluate our ability to pay dividends or repurchase
stock, all consistent with the terms of our debt agreements.
The following table presents selected cash uses in 2010 and the
related projected cash uses for these items in 2011 as of
November 28, 2010:
|
Projected
|
||||||||
|
Cash Used in
|
Cash Uses in
|
|||||||
| 2010 | 2011 | |||||||
| (Dollars in millions) | ||||||||
|
Capital
expenditures
(1)
|
$ | 155 | $ | 140 | ||||
|
Interest
|
147 | 119 | ||||||
|
Federal, foreign and state taxes (net of refunds)
|
53 | 60 | ||||||
|
Pension
plans
(2)
|
38 | 135 | ||||||
|
Postretirement health benefit plans
|
20 | 20 | ||||||
|
Business
acquisitions
(3)
|
12 | — | ||||||
|
Dividend
|
20 | 20 | ||||||
|
Total selected cash requirements
|
$ | 445 | $ | 494 | ||||
| (1) | Capital expenditures consists primarily of costs associated with information technology systems and investment in company-operated retail stores. In 2010, we also remodeled the Company’s headquarters. Cash used in 2010 includes approximately $16 million of tenant improvement allowances that were paid directly by the landlord. | |
| (2) | The estimated increase in pension contribution in 2011 is primarily due to the reduction of the fair value of the plan assets of our U.S. pension plans at November 28, 2010, as compared to the related plan obligations. However, the 2011 contribution amounts will be recalculated at the end of the plans’ fiscal years, which for our U.S. pension plans are at the beginning of the Company’s third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets, as well as alternative methods that may be available to us for measuring our funding obligation. We are currently evaluating such alternatives, which could provide opportunities to significantly lower the required contribution amount. | |
| (3) | Cash used reflects final purchase price payment for our 2009 acquisition of a former licensee in Europe. |
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The following table provides information about our significant
cash contractual obligations and commitments as of
November 28, 2010:
| Payments Due or Projected by Period | ||||||||||||||||||||||||||||
| Total | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Contractual and Long-term Liabilities:
|
||||||||||||||||||||||||||||
|
Short-term and long-term debt
obligations
(1)
|
$ | 1,863 | $ | 46 | $ | 108 | $ | — | $ | 324 | $ | — | $ | 1,385 | ||||||||||||||
|
Interest
(2)
|
826 | 119 | 117 | 113 | 105 | 104 | 268 | |||||||||||||||||||||
|
Capital lease obligations
|
6 | 2 | 2 | 2 | — | — | — | |||||||||||||||||||||
|
Operating
leases
(3)
|
758 | 147 | 125 | 99 | 79 | 69 | 239 | |||||||||||||||||||||
|
Purchase
obligations
(4)
|
550 | 504 | 25 | 19 | 2 | — | — | |||||||||||||||||||||
|
Postretirement
obligations
(5)
|
175 | 20 | 19 | 19 | 18 | 18 | 81 | |||||||||||||||||||||
|
Pension
obligations
(6)
|
430 | 135 | 55 | 52 | 49 | 41 | 98 | |||||||||||||||||||||
|
Long-term employee related
benefits
(7)
|
89 | 10 | 9 | 9 | 9 | 9 | 43 | |||||||||||||||||||||
|
Total
|
$ | 4,697 | $ | 983 | $ | 460 | $ | 313 | $ | 586 | $ | 241 | $ | 2,114 | ||||||||||||||
| (1) | The terms of the trademark tranche of our credit facility require payments of the remaining balance at maturity in 2012. Additionally, the 2011 amount consists of short-term borrowings. | |
| (2) | Interest obligations are computed using constant interest rates until maturity. The LIBOR rate as of November 28, 2010, was used for variable-rate debt. | |
| (3) | Amounts reflect contractual obligations relating to our existing leased facilities as of November 28, 2010, and therefore do not reflect our planned future openings of company-operated retail stores. For more information, see “Item 2 — Properties.” | |
| (4) | Amounts reflect estimated commitments of $457 million for inventory purchases and $93 million for human resources, advertising, information technology and other professional services. | |
| (5) | The amounts presented in the table represent an estimate for the next ten years of our projected payments, based on information provided by our plans’ actuaries, and have not been reduced by estimated Medicare subsidy receipts, the amounts of which are not material. Our policy is to fund postretirement benefits as claims and premiums are paid. For more information, see Note 8 to our audited consolidated financial statements included in this report. | |
| (6) | The amounts presented in the table represent an estimate of our projected contributions to the plans for the next ten years based on information provided by our plans’ actuaries. For U.S. qualified plans, these estimates comply with minimum funded status and minimum required contributions under the Pension Protection Act. The substantial pension contribution estimated for 2011 is primarily due to the reduction of the fair value of the plan assets of our U.S. pension plans at November 28, 2010, as compared to the related plan obligations. However, the 2011 contribution amounts will be recalculated at the end of the plans’ fiscal years, which for our U.S. pension plans are at the beginning of the Company’s third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets, as well as alternative methods that may be available to us for measuring our funding obligation. We are currently evaluating such alternatives, which could provide opportunities to significantly lower the required contribution amount. For more information, see Note 8 to our audited consolidated financial statements included in this report. | |
| (7) | Long-term employee-related benefits relate to the current and non-current portion of deferred compensation arrangements and workers’ compensation. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see Note 12 to our audited consolidated financial statements included in this report. |
This table does not include amounts related to our income tax
liabilities associated with uncertain tax positions of
$150.7 million, as we are unable to make reasonable
estimates for the periods in which these liabilities may become
due. We do not anticipate a material effect on our liquidity as
a result of payments in future periods of liabilities for
uncertain tax positions.
Information in the two preceding tables reflects our estimates
of future cash payments. These estimates and projections are
based upon assumptions that are inherently subject to
significant economic, competitive, legislative and other
uncertainties and contingencies, many of which are beyond our
control. Accordingly, our actual expenditures and liabilities
may be materially higher or lower than the estimates and
projections reflected in these tables. The inclusion of these
projections and estimates should not be regarded as a
representation by us that the estimates will prove to be correct.
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Table of Contents
Cash
flows
The following table summarizes, for the periods indicated,
selected items in our consolidated statements of cash flows:
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Cash provided by operating activities
|
$ | 146.3 | $ | 388.8 | $ | 224.8 | ||||||
|
Cash used for investing activities
|
(181.8 | ) | (233.0 | ) | (26.8 | ) | ||||||
|
Cash provided by (used for) financing activities
|
32.3 | (97.2 | ) | (135.5 | ) | |||||||
|
Cash and cash equivalents
|
269.7 | 270.8 | 210.8 | |||||||||
2010
as compared to 2009
Cash
flows from operating activities
Cash provided by operating activities was $146.3 million
for 2010, as compared to $388.8 million for 2009. Operating
cash declined compared to the prior year due to higher payments
to vendors, reflecting our retail expansion and increased
advertising as well as higher cash used for inventory, in
support of our business growth. This decline was partially
offset by an increase in cash collected from customers,
reflecting our higher net revenues.
Cash
flows from investing activities
Cash used for investing activities was $181.8 million for
2010 compared to $233.0 million for 2009. As compared to
the prior year, the decrease in cash used for investing
activities primarily reflects less cash used for acquisitions
and lower payments on the settlement of our forward foreign
exchange contracts, partially offset by more cash used towards
the remodeling of the Company’s headquarters as well as our
information technology systems associated with the installation
of our global ERP system and our company-operated retail stores.
Cash
flows from financing activities
Cash provided by financing activities was $32.3 million for
2010 compared to cash used of $97.2 million for 2009. Net
cash provided in 2010 reflected our May 2010 refinancing
activities. Cash used in 2009 primarily related to required
payments on the trademark tranche of our senior secured
revolving credit facility; no such payment is required in 2010.
2009
as compared to 2008
Cash
flows from operating activities
Cash provided by operating activities was $388.8 million
for 2009, as compared to $224.8 million for 2008. As
compared to the prior year, we used less cash for inventory,
reflecting our focus on inventory management, and payments to
vendors declined, reflecting our lower SG&A expenses. These
results more than offset the decline in our cash collections,
which was driven primarily by our lower net revenues as well as
our lower beginning accounts receivable balance. Additionally,
the increase in cash provided by operating activities reflected
lower payments for incentive compensation and interest.
Cash
flows from investing activities
Cash used for investing activities was $233.0 million for
2009 compared to $26.8 million for 2008. As compared to the
prior year, the increase in cash used for investing activities
primarily reflects business acquisitions in our Americas and
Europe regions, as well as higher payments on settlement of
forward foreign exchange contracts.
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Cash
flows from financing activities
Cash used for financing activities was $97.2 million for
2009 compared to $135.5 million for 2008. Cash used in both
periods primarily related to required payments on the trademark
tranche of our senior secured revolving credit facility and our
dividend payments to stockholders. Cash used for financing
activities in 2008 also reflects our redemption in March 2008 of
our remaining $18.8 million outstanding 12.25% senior
notes due 2012.
Indebtedness
The borrower of substantially all of our debt is Levi
Strauss & Co., the parent and U.S. operating
company. Of our total debt of $1.9 billion, we had
fixed-rate debt of approximately $1.5 billion (77% of total
debt) and variable-rate debt of approximately $0.4 billion
(23% of total debt) as of November 28, 2010. Our required
aggregate debt principal payments, excluding short-term
borrowings, are $108.3 million in 2012, $323.7 million
in 2014 and the remaining $1.4 billion in years after 2015.
Short-term borrowings totaling $46.4 million as of
November 28, 2010, are expected to be either paid over the
next twelve months or refinanced at the end of their applicable
terms.
Our long-term debt agreements contain customary covenants
restricting our activities as well as those of our subsidiaries.
Currently, we are in compliance with all of these covenants.
Effects
of Inflation
We believe that inflation in the regions where most of our sales
occur has not had a significant effect on our net revenues or
profitability.
Off-Balance
Sheet Arrangements, Guarantees and Other Contingent
Obligations
Off-balance sheet arrangements and
other.
We have contractual commitments for
non-cancelable operating leases; for more information, see
Note 13 to our audited consolidated financial statements
included in this report. We participate in a multiemployer
pension plan, however our exposure to risks arising from
participation in the plan and the extent to which we can be
liable to the plan for other participating employers’
obligations are not material in the near-term. We have no other
material non-cancelable guarantees or commitments, and no
material special-purpose entities or other off-balance sheet
debt obligations.
Indemnification agreements.
In the
ordinary course of our business, we enter into agreements
containing indemnification provisions under which we agree to
indemnify the other party for specified claims and losses. For
example, our trademark license agreements, real estate leases,
consulting agreements, logistics outsourcing agreements,
securities purchase agreements and credit agreements typically
contain these provisions. This type of indemnification provision
obligates us to pay certain amounts associated with claims
brought against the other party as the result of trademark
infringement, negligence or willful misconduct of our employees,
breach of contract by us including inaccuracy of representations
and warranties, specified lawsuits in which we and the other
party are co-defendants, product claims and other matters. These
amounts are generally not readily quantifiable: the maximum
possible liability or amount of potential payments that could
arise out of an indemnification claim depends entirely on the
specific facts and circumstances associated with the claim. We
have insurance coverage that minimizes the potential exposure to
certain of these claims. We also believe that the likelihood of
substantial payment obligations under these agreements to third
parties is low and that any such amounts would be immaterial.
Critical
Accounting Policies, Assumptions and Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and the related notes. We believe that the following
discussion addresses our critical accounting policies, which are
those that are most important to the portrayal of our financial
condition and results of operations and require
management’s most difficult, subjective and complex
judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain. Changes in
such estimates, based on newly available information, or
different assumptions or conditions, may affect amounts reported
in future periods.
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Table of Contents
We summarize our critical accounting policies below.
Revenue recognition.
Net sales is
primarily comprised of sales of products to wholesale customers,
including franchised stores, and direct sales to consumers at
our company-operated and online stores and at our
company-operated
shop-in-shops
located within department stores. We recognize revenue on sale
of product when the goods are shipped or delivered and title to
the goods passes to the customer provided that: there are no
uncertainties regarding customer acceptance; persuasive evidence
of an arrangement exists; the sales price is fixed or
determinable; and collectability is reasonably assured. Revenue
is recorded net of an allowance for estimated returns, discounts
and retailer promotions and other similar incentives. Licensing
revenues from the use of our trademarks in connection with the
manufacturing, advertising, and distribution of trademarked
products by third-party licensees are earned and recognized as
products are sold by licensees based on royalty rates as set
forth in the licensing agreements.
We recognize allowances for estimated returns in the period in
which the related sale is recorded. We recognize allowances for
estimated discounts, retailer promotions and other similar
incentives at the later of the period in which the related sale
is recorded or the period in which the sales incentive is
offered to the customer. We estimate non-volume based allowances
based on historical rates as well as customer and
product-specific circumstances. Actual allowances may differ
from estimates due to changes in sales volume based on retailer
or consumer demand and changes in customer and product-specific
circumstances. Sales and value-added taxes collected from
customers and remitted to governmental authorities are presented
on a net basis in the accompanying consolidated statements of
income.
Accounts receivable, net.
We extend
credit to our wholesale and licensing customers that satisfy
pre-defined credit criteria. Accounts receivable are recorded
net of an allowance for doubtful accounts. We estimate the
allowance for doubtful accounts based upon an analysis of the
aging of accounts receivable at the date of the consolidated
financial statements, assessments of collectability based on
historic trends, customer-specific circumstances, and an
evaluation of economic conditions. Actual write-off of
receivables may differ from estimates due to changes in customer
and economic circumstances.
Inventory valuation.
We value
inventories at the lower of cost or market value. Inventory cost
is generally determined using the
first-in
first-out method. We include product costs, labor and related
overhead, sourcing costs, inbound freight, internal transfers,
and the cost of operating our remaining manufacturing
facilities, including the related depreciation expense, in the
cost of inventories. In determining inventory market values,
substantial consideration is given to the expected product
selling price. We estimate quantities of slow-moving and
obsolete inventory by reviewing on-hand quantities, outstanding
purchase obligations and forecasted sales. We then estimate
expected selling prices based on our historical recovery rates
for sale of slow-moving and obsolete inventory and other
factors, such as market conditions, expected channel of
disposition, and current consumer preferences. Estimates may
differ from actual results due to changes in resale or market
value, avenues of disposition, consumer and retailer preferences
and economic conditions.
Impairment.
We review our goodwill and
other
non-amortized
intangible assets for impairment annually in the fourth quarter
of our fiscal year, or more frequently as warranted by events or
changes in circumstances which indicate that the carrying amount
may not be recoverable. In our impairment tests, we use a
two-step approach. In the first step, we compare the carrying
value of the applicable asset or reporting unit to its fair
value, which we estimate using a discounted cash flow analysis
or by comparison to the market values of similar assets. If the
carrying amount of the asset or reporting unit exceeds its
estimated fair value, we perform the second step, and determine
the impairment loss, if any, as the excess of the carrying value
of the goodwill or intangible asset over its fair value. The
assumptions used in such valuations are subject to volatility
and may differ from actual results; however, based on the
carrying value of our goodwill and other
non-amortized
intangible assets as of November 28, 2010, relative to
their estimated fair values, we do not anticipate any material
impairment charges in the near-term.
We review our other long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. If the carrying amount of an
other long-lived asset exceeds the expected future undiscounted
cash flows, we measure and record an impairment loss for the
excess of the carrying value of the asset over its fair value.
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To determine the fair value of impaired assets, we utilize the
valuation technique or techniques deemed most appropriate based
on the nature of the impaired asset and the data available,
which may include the use of quoted market prices, prices for
similar assets or other valuation techniques such as discounted
future cash flows or earnings.
Income tax assets and liabilities.
We
are subject to income taxes in both the U.S. and numerous
foreign jurisdictions. We compute our provision for income taxes
using the asset and liability method, under which deferred tax
assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities and for
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using the currently enacted tax
rates that are expected to apply to taxable income for the years
in which those tax assets and liabilities are expected to be
realized or settled. Significant judgments are required in order
to determine the realizability of these deferred tax assets. In
assessing the need for a valuation allowance, we evaluate all
significant available positive and negative evidence, including
historical operating results, estimates of future taxable income
and the existence of prudent and feasible tax planning
strategies. Changes in the expectations regarding the
realization of deferred tax assets could materially impact
income tax expense in future periods.
We do not recognize deferred taxes with respect to temporary
differences between the book and tax bases in our investments in
foreign subsidiaries, unless it becomes apparent that these
temporary differences will reverse in the foreseeable future.
We continuously review issues raised in connection with all
ongoing examinations and open tax years to evaluate the adequacy
of our liabilities. We evaluate uncertain tax positions under a
two-step approach. The first step is to evaluate the uncertain
tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not
that the position will be sustained upon examination based on
its technical merits. The second step is, for those positions
that meet the recognition criteria, to measure the tax benefit
as the largest amount that is more than fifty percent likely of
being realized. We believe our recorded tax liabilities are
adequate to cover all open tax years based on our assessment.
This assessment relies on estimates and assumptions and involves
significant judgments about future events. To the extent that
our view as to the outcome of these matters changes, we will
adjust income tax expense in the period in which such
determination is made. We classify interest and penalties
related to income taxes as income tax expense.
Derivative and foreign exchange management
activities.
We recognize all derivatives as
assets and liabilities at their fair values. We may use
derivatives and establish programs from time to time to manage
foreign currency and interest rate exposures that are sensitive
to changes in market conditions. The instruments that we
designate and that qualify for hedge accounting treatment hedge
our net investment position in certain of our foreign. For these
instruments, we document the hedge designation by identifying
the hedging instrument, the nature of the risk being hedged and
the approach for measuring hedge ineffectiveness. The
ineffective portions of hedges are recorded in “Other
income (expense), net” in our consolidated statements of
income. The gains and losses on the instruments that we
designate and that qualify for hedge accounting treatment are
recorded in “Accumulated other comprehensive income
(loss)” in our consolidated balance sheets until the
underlying has been settled and is then reclassified to
earnings. Changes in the fair values of the derivative
instruments that we do not designate or that do not qualify for
hedge accounting are recorded in “Other income (expense),
net” or “Interest expense” in our consolidated
statements of income to reflect the economic risk being
mitigated.
Employee
benefits and incentive compensation
Pension and postretirement benefits
.
We
have several non-contributory defined benefit retirement plans
covering eligible employees. We also provide certain health care
benefits for U.S. employees who meet age, participation and
length of service requirements at retirement. In addition, we
sponsor other retirement or post-employment plans for our
foreign employees in accordance with local government programs
and requirements. We retain the right to amend, curtail or
discontinue any aspect of the plans, subject to local
regulations. Any of these actions, either individually or in
combination, could have a material impact on our consolidated
financial statements and on our future financial performance.
39
Table of Contents
We recognize either an asset or liability for any plan’s
funded status in our consolidated balance sheets. We measure
changes in funded status using actuarial models which use an
attribution approach that generally spreads individual events
over the estimated service lives of the employees in the plan.
The attribution approach assumes that employees render service
over their service lives on a relatively smooth basis and as
such, presumes that the income statement effects of pension or
postretirement benefit plans should follow the same pattern. Our
policy is to fund our pension plans based upon actuarial
recommendations and in accordance with applicable laws, income
tax regulations and credit agreements.
Net pension and postretirement benefit income or expense is
generally determined using assumptions which include expected
long-term rates of return on plan assets, discount rates,
compensation rate increases and medical trend rates. We use a
mix of actual historical rates, expected rates and external data
to determine the assumptions used in the actuarial models. For
example, we utilized a yield curve constructed from a portfolio
of high-quality corporate bonds with various maturities to
determine the appropriate discount rate to use for our
U.S. benefit plans. Under this model, each year’s
expected future benefit payments are discounted to their present
value at the appropriate yield curve rate, thereby generating
the overall discount rate. We utilized country-specific
third-party bond indices to determine appropriate discount rates
to use for benefit plans of our foreign subsidiaries. Changes in
actuarial assumptions and estimates, either individually or in
combination, could have a material impact on our consolidated
financial statements and on our future financial performance.
For example, as of November 28, 2010, a twenty-five
basis-point change in the discount rate would yield an
approximately three-percent change in the projected benefit
obligation and annual service cost of our pension and
postretirement benefit plans.
Employee incentive compensation
.
We
maintain short-term and long-term employee incentive
compensation plans. These plans are intended to reward eligible
employees for their contributions to our short-term and
long-term success. For our short-term plans, the amount of the
cash bonus earned depends upon business unit and corporate
financial results as measured against pre-established targets,
and also depends upon the performance and job level of the
individual. Our long-term plans are intended to reward
management for its long-term impact on our total earnings
performance. Performance is measured at the end of a three-year
period based on our performance over the period measured against
certain pre-established targets such as earnings before
interest, taxes, depreciation and amortization
(“EBITDA”) or compound annual growth rates over the
periods. We accrue the related compensation expense over the
period of the plan, and changes in our projected future
financial performance could have a material impact on our
accruals.
Recently
Issued Accounting Standards
See Note 1 to our audited consolidated financial statements
included in this report for recently issued accounting
standards, including the expected dates of adoption and expected
impact to our consolidated financial statements upon adoption.
FORWARD-LOOKING
STATEMENTS
Certain matters discussed in this report, including (without
limitation) statements under “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” contain forward-looking statements. Although we
believe that, in making any such statements, our expectations
are based on reasonable assumptions, any such statement may be
influenced by factors that could cause actual outcomes and
results to be materially different from those projected.
These forward-looking statements include statements relating to
our anticipated financial performance and business prospects
and/or
statements preceded by, followed by or that include the words
“believe”, “anticipate”, “intend”,
“estimate”, “expect”, “project”,
“could”, “plans”, “seeks” and
similar expressions. These forward-looking statements speak only
as of the date stated and we do not undertake any obligation to
update or revise publicly any forward-looking statements,
whether as a result of new information, future events or
otherwise, even if experience or future events make it clear
that any expected results expressed or implied by these
forward-looking statements will not be realized. Although we
believe that the expectations reflected in these forward-looking
statements are reasonable, these expectations may not prove to
be correct or we may not achieve the financial results, savings
or other benefits anticipated in the forward-looking statements.
These forward-looking statements
40
Table of Contents
are necessarily estimates reflecting the best judgment of our
senior management and involve a number of risks and
uncertainties, some of which may be beyond our control, that
could cause actual results to differ materially from those
suggested by the forward-looking statements and include, without
limitation:
| • | changes in the level of consumer spending for apparel in view of general economic conditions, and our ability to plan for and respond to the impact of those changes; | |
| • | consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, general economic conditions and changing consumer preferences; | |
| • | our ability to mitigate costs related to manufacturing, sourcing, and raw materials supply, such as cotton; | |
| • | our ability to grow our Dockers ® brand and to expand our Denizen tm brand into new markets and channels; | |
| • | our and our wholesale customers’ decisions to modify strategies and adjust product mix, and our ability to manage any resulting product transition costs; | |
| • | our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points and shopping experiences; | |
| • | our ability to respond to price, innovation and other competitive pressures in the apparel industry and on our key customers; | |
| • | our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores; | |
| • | our effectiveness in increasing productivity and efficiency in our operations; | |
| • | our ability to implement, stabilize and optimize our enterprise resource planning system throughout our business without disruption or to mitigate such disruptions; | |
| • | consequences of foreign currency exchange rate fluctuations; | |
| • | the impact of the variables that effect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans; | |
| • | our dependence on key distribution channels, customers and suppliers; | |
| • | our ability to utilize our tax credits and net operating loss carryforwards; | |
| • | ongoing or future litigation matters and disputes and regulatory developments; | |
| • | changes in or application of trade and tax laws; and | |
| • | political, social or economic instability in countries where we do business. |
Our actual results might differ materially from historical
performance or current expectations. We do not undertake any
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise.
41
Table of Contents
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Investment
and Credit Availability Risk
We manage cash and cash equivalents in various institutions at
levels beyond FDIC coverage limits, and we purchase investments
not guaranteed by the FDIC. Accordingly, there may be a risk
that we will not recover the full principal of our investments
or that their liquidity may be diminished. To mitigate this
risk, our investment policy emphasizes preservation of principal
and liquidity.
Multiple financial institutions are committed to provide loans
and other credit instruments under our secured revolving credit
facility. There may be a risk that some of these institutions
cannot deliver against these obligations in a timely manner, or
at all.
Derivative
Financial Instruments
We are exposed to market risk primarily related to foreign
currencies. We manage foreign currency risks with the objective
to minimize the effect of fluctuations in foreign exchange rates
on nonfunctional currency cash flows of the Company and its
subsidiaries and selected assets or liabilities of the Company
and its subsidiaries without exposing the Company to additional
risk associated with transactions that could be regarded as
speculative.
We are exposed to credit loss in the event of nonperformance by
the counterparties to the forward foreign exchange. However, we
believe that our exposures are appropriately diversified across
counterparties and that these counterparties are creditworthy
financial institutions. We monitor the creditworthiness of our
counterparties in accordance with our foreign exchange and
investment policies. In addition, we have International Swaps
and Derivatives Association, Inc. (“ISDA”) master
agreements in place with our counterparties to mitigate the
credit risk related to the outstanding derivatives. These
agreements provide the legal basis for
over-the-counter
transactions in many of the world’s commodity and financial
markets.
Foreign
Exchange Risk
The global scope of our business operations exposes us to the
risk of fluctuations in foreign currency markets. This exposure
is the result of certain product sourcing activities, some
intercompany sales, foreign subsidiaries’ royalty payments,
interest payments, earnings repatriations, net investment in
foreign operations and funding activities. Our foreign currency
management objective is to minimize the effect of fluctuations
in foreign exchange rates on nonfunctional currency cash flows
of the Company and its subsidiaries and selected assets or
liabilities of the Company and its subsidiaries without exposing
the Company to additional risk associated with transactions that
could be regarded as speculative. We manage forecasted exposures.
We use a centralized currency management operation to take
advantage of potential opportunities to naturally offset
exposures against each other. For any residual exposures under
management, we may enter into various financial instruments
including forward exchange and option contracts to hedge certain
forecasted transactions as well as certain firm commitments,
including third-party and intercompany transactions. We manage
the currency risk associated with certain cash flows
periodically and only partially manage the timing mismatch
between our forecasted exposures and the related financial
instruments used to mitigate the currency risk.
Our foreign exchange risk management activities are governed by
a foreign exchange risk management policy approved by our
Treasury committee. Members of our Treasury committee, comprised
of a group of our senior financial executives, review our
foreign exchange activities to ensure compliance with our
policies. The operating policies and guidelines outlined in the
foreign exchange risk management policy provide a framework that
allows for an active approach to the management of currency
exposures while ensuring the activities are conducted within
established parameters. Our policy includes guidelines for the
organizational structure of our risk management function and for
internal controls over foreign exchange risk management
activities, including various measurements for monitoring
compliance. We monitor foreign exchange risk and related
derivatives using different techniques including a review of
market value, sensitivity analysis and a
value-at-risk
model. We use the market approach to estimate the fair value of
our foreign exchange derivative contracts.
42
Table of Contents
We use derivative instruments to manage certain but not all
exposures to foreign currencies. Our approach to managing
foreign currency exposures is consistent with that applied in
previous years. As of November 28, 2010, we had forward
foreign exchange contracts to buy $623.7 million and to
sell $392.5 million against various foreign currencies.
These contracts are at various exchange rates and expire at
various dates through February 2012.
As of November 29, 2009, we had forward foreign exchange
contracts to buy $523.5 million and to sell
$175.1 million against various foreign currencies. These
contracts are at various exchange rates and expire at various
dates through December 2010.
The following table presents the currency, average forward
exchange rate, notional amount and fair values for our
outstanding forward and swap contracts as of November 28,
2010, and November 29, 2009. The average forward rate is
the forward rate weighted by the total of the transacted
amounts. The notional amount represents the U.S. Dollar
equivalent amount of the foreign currency at the inception of
the contracts. A positive notional amount represents a long
position in U.S. Dollar versus the exposure currency, while
a negative notional amount represents a short position in
U.S. Dollar versus the exposure currency. The net position
is the sum of all buy transactions and the sum of all sell
transactions. All amounts are stated in U.S. Dollar
equivalents. All transactions will mature before the end of
February 2012.
| As of November 28, 2010 | As of November 29, 2009 | |||||||||||||||||||||||
|
Average Forward
|
Notional
|
Fair
|
Average Forward
|
Notional
|
Fair
|
|||||||||||||||||||
| Exchange Rate | Amount | Value | Exchange Rate | Amount | Value | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Currency
|
||||||||||||||||||||||||
|
Australian Dollar
|
0.96 | $ | 29,475 | $ | (203 | ) | 0.84 | $ | 53,061 | $ | (2,420 | ) | ||||||||||||
|
Brazilian Real
|
1.87 | 656 | (3 | ) | 1.96 | 626 | (23 | ) | ||||||||||||||||
|
Canadian Dollar
|
1.02 | 30,126 | (30 | ) | 1.09 | 52,946 | (1,972 | ) | ||||||||||||||||
|
Swiss Franc
|
1.02 | (35,178 | ) | (781 | ) | 1.00 | (15,246 | ) | (125 | ) | ||||||||||||||
|
Czech Koruna
|
17.96 | 2,799 | 156 | 17.36 | 2,689 | 62 | ||||||||||||||||||
|
Danish Krone
|
0.18 | 24,406 | 897 | 0.20 | 26,684 | 245 | ||||||||||||||||||
|
Euro
|
1.31 | (72,842 | ) | (3,273 | ) | 1.46 | 70,472 | (1,192 | ) | |||||||||||||||
|
British Pound Sterling
|
0.63 | 37,447 | 626 | 0.62 | 34,414 | (497 | ) | |||||||||||||||||
|
Hong Kong Dollar
|
— | — | — | 7.75 | (14 | ) | — | |||||||||||||||||
|
Hungarian Forint
|
201.26 | (5,423 | ) | (392 | ) | 200.87 | (5,887 | ) | (392 | ) | ||||||||||||||
|
Japanese Yen
|
81.72 | 65,123 | 1,229 | 93.67 | 37,704 | (3,228 | ) | |||||||||||||||||
|
South Korean Won
|
1,133.51 | 21,244 | 576 | 1,224.91 | 16,745 | (824 | ) | |||||||||||||||||
|
Mexican Peso
|
12.72 | 57,854 | (433 | ) | 13.94 | 30,588 | (1,623 | ) | ||||||||||||||||
|
Norwegian Krone
|
0.17 | 10,709 | 630 | 0.17 | 8,878 | (464 | ) | |||||||||||||||||
|
New Zealand Dollar
|
1.31 | (1,963 | ) | (430 | ) | 1.38 | (9,581 | ) | (270 | ) | ||||||||||||||
|
Polish Zloty
|
2.87 | (45,139 | ) | (2,999 | ) | 2.85 | (52,830 | ) | 224 | |||||||||||||||
|
Russian Ruble
|
31.24 | 13,804 | 388 | — | — | — | ||||||||||||||||||
|
Swedish Krona
|
6.84 | 73,945 | 1,869 | 6.97 | 73,272 | 635 | ||||||||||||||||||
|
Singapore Dollar
|
1.29 | (30,140 | ) | (428 | ) | 1.40 | (28,734 | ) | 167 | |||||||||||||||
|
New Taiwan Dollar
|
30.28 | 27,209 | (172 | ) | 31.70 | 29,678 | 487 | |||||||||||||||||
|
South African Rand
|
7.13 | 27,102 | 500 | 8.50 | 22,961 | (2,588 | ) | |||||||||||||||||
|
Total
|
$ | 231,214 | $ | (2,273 | ) | $ | 348,426 | $ | (13,798 | ) | ||||||||||||||
43
Table of Contents
Interest
rate risk
We maintain a mix of medium and long-term fixed- and
variable-rate debt.
The following table provides information about our financial
instruments that are sensitive to changes in interest rates. The
table presents principal (face amount) outstanding balances of
our debt instruments and the related weighted-average interest
rates for the years indicated based on expected maturity dates.
The applicable floating rate index is included for variable-rate
instruments. All amounts are stated in U.S. Dollar
equivalents.
|
As of
|
||||||||||||||||||||||||||||||||||||
| As of November 28, 2010 |
November 29,
|
|||||||||||||||||||||||||||||||||||
| Expected Maturity Date |
Fair Value
|
2009
|
||||||||||||||||||||||||||||||||||
| 2011 (1) | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | 2010 | Total | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
|
Debt Instruments
|
||||||||||||||||||||||||||||||||||||
|
Fixed Rate (US$)
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | 875,000 | $ | 875,000 | $ | 915,686 | $ | 796,210 | ||||||||||||||||||
|
Average Interest Rate
|
— | — | — | — | — | 8.13 | % | 8.13 | % | |||||||||||||||||||||||||||
|
Fixed Rate (Yen 9.1 billion)
|
— | — | — | — | — | 109,062 | 109,062 | 98,063 | 231,709 | |||||||||||||||||||||||||||
|
Average Interest Rate
|
— | — | — | — | — | 4.25 | % | 4.25 | % | |||||||||||||||||||||||||||
|
Fixed Rate (Euro 300 million)
|
— | — | — | — | — | 400,740 | 400,740 | 407,993 | 372,325 | |||||||||||||||||||||||||||
|
Average Interest Rate
|
— | — | — | — | — | 7.75 | % | 7.75 | % | |||||||||||||||||||||||||||
|
Variable Rate (US$)
|
— | 108,250 | — | 325,000 | — | — | 433,250 | 418,605 | 433,250 | |||||||||||||||||||||||||||
|
Average Interest
Rate
(2)
|
— | 2.76 | % | — | 2.50 | % | — | — | 2.57 | % | ||||||||||||||||||||||||||
|
Total Principal (face amount) of our debt instruments
|
$ | — | $ | 108,250 | $ | — | $ | 325,000 | $ | — | $ | 1,384,802 | $ | 1,818,052 | $ | 1,840,347 | $ | 1,833,494 | ||||||||||||||||||
| (1) | Excludes short-term borrowings. | |
| (2) | Assumes no change in short-term interest rates. Expected maturities due 2012 relate to the trademark tranche of our senior revolving credit facility. Expected maturities due 2014 relate to our Senior Term Loan. |
44
Table of Contents
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Levi Strauss & Co.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income,
stockholders’ deficit and comprehensive income, and of cash
flows present fairly, in all material respects, the financial
position of Levi Strauss & Co. and its subsidiaries at
November 28, 2010 and November 29, 2009, and the
results of their operations and their cash flows for each of the
three years in the period ended November 28, 2010, in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
related financial statement schedule listed in the index
appearing under Item 15(2) presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and the financial statement schedule
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our
audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in fiscal 2008.
PricewaterhouseCoopers LLP
San Francisco, CA
February 8, 2011
45
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
November 28,
|
November 29,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 269,726 | $ | 270,804 | ||||
|
Restricted cash
|
4,028 | 3,684 | ||||||
|
Trade receivables, net of allowance for doubtful accounts of
$24,617 and $22,523
|
553,385 | 552,252 | ||||||
|
Inventories:
|
||||||||
|
Raw materials
|
6,770 | 6,818 | ||||||
|
Work-in-process
|
9,405 | 10,908 | ||||||
|
Finished goods
|
563,728 | 433,546 | ||||||
|
Total inventories
|
579,903 | 451,272 | ||||||
|
Deferred tax assets, net
|
137,892 | 135,508 | ||||||
|
Other current assets
|
106,198 | 92,344 | ||||||
|
Total current assets
|
1,651,132 | 1,505,864 | ||||||
|
Property, plant and equipment, net of accumulated depreciation
of $683,258 and $664,891
|
488,603 | 430,070 | ||||||
|
Goodwill
|
241,472 | 241,768 | ||||||
|
Other intangible assets, net
|
84,652 | 103,198 | ||||||
|
Non-current deferred tax assets, net
|
559,053 | 601,526 | ||||||
|
Other assets
|
110,337 | 106,955 | ||||||
|
Total assets
|
$ | 3,135,249 | $ | 2,989,381 | ||||
| LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
|
Current Liabilities:
|
||||||||
|
Short-term borrowings
|
$ | 46,418 | $ | 18,749 | ||||
|
Current maturities of long-term debt
|
— | — | ||||||
|
Current maturities of capital leases
|
1,777 | 1,852 | ||||||
|
Accounts payable
|
212,935 | 198,220 | ||||||
|
Other accrued liabilities
|
275,443 | 271,019 | ||||||
|
Accrued salaries, wages and employee benefits
|
196,152 | 195,434 | ||||||
|
Accrued interest payable
|
9,685 | 28,709 | ||||||
|
Accrued income taxes
|
17,115 | 12,993 | ||||||
|
Total current liabilities
|
759,525 | 726,976 | ||||||
|
Long-term debt
|
1,816,728 | 1,834,151 | ||||||
|
Long-term capital leases
|
3,578 | 5,513 | ||||||
|
Postretirement medical benefits
|
147,065 | 156,834 | ||||||
|
Pension liability
|
400,584 | 382,503 | ||||||
|
Long-term employee related benefits
|
102,764 | 97,508 | ||||||
|
Long-term income tax liabilities
|
50,552 | 55,862 | ||||||
|
Other long-term liabilities
|
54,281 | 43,480 | ||||||
|
Total liabilities
|
3,335,077 | 3,302,827 | ||||||
|
Commitments and contingencies
|
||||||||
|
Temporary equity
|
8,973 | 1,938 | ||||||
|
Stockholders’ Deficit:
|
||||||||
|
Levi Strauss & Co. stockholders’ deficit
|
||||||||
|
Common stock — $.01 par value;
270,000,000 shares authorized; 37,322,358 shares and
37,284,741 shares issued and outstanding
|
373 | 373 | ||||||
|
Additional paid-in capital
|
18,840 | 39,532 | ||||||
|
Accumulated earnings (deficit)
|
33,346 | (123,157 | ) | |||||
|
Accumulated other comprehensive loss
|
(272,168 | ) | (249,867 | ) | ||||
|
Total Levi Strauss & Co. stockholders’ deficit
|
(219,609 | ) | (333,119 | ) | ||||
|
Noncontrolling interest
|
10,808 | 17,735 | ||||||
|
Total stockholders’ deficit
|
(208,801 | ) | (315,384 | ) | ||||
|
Total liabilities, temporary equity and stockholders’
deficit
|
$ | 3,135,249 | $ | 2,989,381 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
46
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net sales
|
$ | 4,325,908 | $ | 4,022,854 | $ | 4,303,075 | ||||||
|
Licensing revenue
|
84,741 | 82,912 | 97,839 | |||||||||
|
Net revenues
|
4,410,649 | 4,105,766 | 4,400,914 | |||||||||
|
Cost of goods sold
|
2,187,726 | 2,132,361 | 2,261,112 | |||||||||
|
Gross profit
|
2,222,923 | 1,973,405 | 2,139,802 | |||||||||
|
Selling, general and administrative expenses
|
1,841,562 | 1,595,317 | 1,614,730 | |||||||||
|
Operating income
|
381,361 | 378,088 | 525,072 | |||||||||
|
Interest expense
|
(135,823 | ) | (148,718 | ) | (154,086 | ) | ||||||
|
Loss on early extinguishment of debt
|
(16,587 | ) | — | (1,417 | ) | |||||||
|
Other income (expense), net
|
6,647 | (39,445 | ) | (303 | ) | |||||||
|
Income before income taxes
|
235,598 | 189,925 | 369,266 | |||||||||
|
Income tax expense
|
86,152 | 39,213 | 138,884 | |||||||||
|
Net income
|
149,446 | 150,712 | 230,382 | |||||||||
|
Net loss (income) attributable to noncontrolling interest
|
7,057 | 1,163 | (1,097 | ) | ||||||||
|
Net income attributable to Levi Strauss & Co.
|
$ | 156,503 | $ | 151,875 | $ | 229,285 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
47
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT AND COMPREHENSIVE
INCOME
| Levi Strauss & Co. Stockholders | ||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Accumulated
|
Other
|
||||||||||||||||||||||
|
Common
|
Paid-In
|
Earnings
|
Comprehensive
|
Noncontrolling
|
Stockholders’
|
|||||||||||||||||||
| Stock | Capital | (Deficit) | Income (Loss) | Interest | Deficit | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Balance at November 25, 2007
|
$ | 373 | $ | 92,650 | $ | (499,093 | ) | $ | 8,041 | $ | 15,833 | $ | (382,196 | ) | ||||||||||
|
Net income
|
— | — | 229,285 | — | 1,097 | 230,382 | ||||||||||||||||||
|
Other comprehensive (loss) income (net of tax)
|
— | — | — | (135,956 | ) | 2,166 | (133,790 | ) | ||||||||||||||||
|
Total comprehensive income
|
96,592 | |||||||||||||||||||||||
|
Cumulative-effect adjustment related to uncertain tax positions
(amendment to ASC 740, “Income Taxes”)
|
— | — | (5,224 | ) | — | — | (5,224 | ) | ||||||||||||||||
|
Stock-based compensation, net
|
— | 10,360 | — | — | — | 10,360 | ||||||||||||||||||
|
Cash dividend paid
|
— | (49,953 | ) | — | — | (1,114 | ) | (51,067 | ) | |||||||||||||||
|
Balance at November 30, 2008
|
373 | 53,057 | (275,032 | ) | (127,915 | ) | 17,982 | (331,535 | ) | |||||||||||||||
|
Net income (loss)
|
— | — | 151,875 | — | (1,163 | ) | 150,712 | |||||||||||||||||
|
Other comprehensive (loss) income (net of tax)
|
— | — | — | (121,952 | ) | 1,894 | (120,058 | ) | ||||||||||||||||
|
Total comprehensive income
|
30,654 | |||||||||||||||||||||||
|
Stock-based compensation, net
|
— | 6,476 | — | — | — | 6,476 | ||||||||||||||||||
|
Cash dividend paid
|
— | (20,001 | ) | — | — | (978 | ) | (20,979 | ) | |||||||||||||||
|
Balance at November 29, 2009
|
373 | 39,532 | (123,157 | ) | (249,867 | ) | 17,735 | (315,384 | ) | |||||||||||||||
|
Net income (loss)
|
— | — | 156,503 | — | (7,057 | ) | 149,446 | |||||||||||||||||
|
Other comprehensive (loss) income (net of tax)
|
— | — | — | (22,301 | ) | 130 | (22,171 | ) | ||||||||||||||||
|
Total comprehensive income
|
127,275 | |||||||||||||||||||||||
|
Stock-based compensation, net
|
— | (601 | ) | — | — | — | (601 | ) | ||||||||||||||||
|
Repurchase of common stock
|
— | (78 | ) | — | — | — | (78 | ) | ||||||||||||||||
|
Cash dividend paid
|
— | (20,013 | ) | — | — | — | (20,013 | ) | ||||||||||||||||
|
Balance at November 28, 2010
|
$ | 373 | $ | 18,840 | $ | 33,346 | $ | (272,168 | ) | $ | 10,808 | $ | (208,801 | ) | ||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
48
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income
|
$ | 149,446 | $ | 150,712 | $ | 230,382 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
104,896 | 84,603 | 77,983 | |||||||||
|
Asset impairments
|
6,865 | 16,814 | 20,308 | |||||||||
|
(Gain) loss on disposal of property, plant and equipment
|
(248 | ) | (175 | ) | 40 | |||||||
|
Unrealized foreign exchange (gains) losses
|
(17,662 | ) | 14,657 | 50,736 | ||||||||
|
Realized loss (gain) on settlement of forward foreign exchange
contracts not
|
||||||||||||
|
designated for hedge accounting
|
16,342 | 50,760 | (53,499 | ) | ||||||||
|
Employee benefit plans’ amortization from accumulated other
comprehensive loss
|
3,580 | (19,730 | ) | (35,995 | ) | |||||||
|
Employee benefit plans’ curtailment loss (gain), net
|
106 | 1,643 | (5,162 | ) | ||||||||
|
Noncash (gain) loss on extinguishment of debt, net of write-off
of unamortized
|
||||||||||||
|
debt issuance costs
|
(13,647 | ) | — | 394 | ||||||||
|
Amortization of deferred debt issuance costs
|
4,332 | 4,344 | 4,007 | |||||||||
|
Stock-based compensation
|
6,438 | 7,822 | 6,832 | |||||||||
|
Allowance for doubtful accounts
|
7,536 | 7,246 | 10,376 | |||||||||
|
Deferred income taxes
|
31,113 | (5,128 | ) | 75,827 | ||||||||
|
Change in operating assets and liabilities (excluding assets and
liabilities acquired):
|
||||||||||||
|
Trade receivables
|
(30,259 | ) | 27,568 | 61,707 | ||||||||
|
Inventories
|
(148,533 | ) | 113,014 | (21,777 | ) | |||||||
|
Other current assets
|
(20,131 | ) | 5,626 | (25,400 | ) | |||||||
|
Other non-current assets
|
(7,160 | ) | (11,757 | ) | (16,773 | ) | ||||||
|
Accounts payable and other accrued liabilities
|
39,886 | (58,185 | ) | (100,388 | ) | |||||||
|
Income tax liabilities
|
6,330 | (3,377 | ) | 3,923 | ||||||||
|
Accrued salaries, wages and employee benefits
|
(18,463 | ) | (20,082 | ) | (30,566 | ) | ||||||
|
Long-term employee related benefits
|
6,335 | 26,871 | (35,112 | ) | ||||||||
|
Other long-term liabilities
|
19,120 | (4,452 | ) | 6,922 | ||||||||
|
Other, net
|
52 | (11 | ) | 44 | ||||||||
|
Net cash provided by operating activities
|
146,274 | 388,783 | 224,809 | |||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Purchases of property, plant and equipment
|
(154,632 | ) | (82,938 | ) | (80,350 | ) | ||||||
|
Proceeds from sale of property, plant and equipment
|
1,549 | 939 | 995 | |||||||||
|
(Payments) proceeds on settlement of forward foreign exchange
|
||||||||||||
|
contracts not designated for hedge accounting
|
(16,342 | ) | (50,760 | ) | 53,499 | |||||||
|
Acquisitions, net of cash acquired
|
(12,242 | ) | (100,270 | ) | (959 | ) | ||||||
|
Other
|
(114 | ) | — | — | ||||||||
|
Net cash used for investing activities
|
(181,781 | ) | (233,029 | ) | (26,815 | ) | ||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Proceeds from issuance of long-term debt
|
909,390 | — | — | |||||||||
|
Repayments of long-term debt and capital leases
|
(866,051 | ) | (72,870 | ) | (94,904 | ) | ||||||
|
Short-term borrowings, net
|
27,311 | (2,704 | ) | 12,181 | ||||||||
|
Debt issuance costs
|
(17,546 | ) | — | (446 | ) | |||||||
|
Restricted cash
|
(700 | ) | (602 | ) | (1,224 | ) | ||||||
|
Repurchase of common stock
|
(78 | ) | — | — | ||||||||
|
Dividends to noncontrolling interest shareholders
|
— | (978 | ) | (1,114 | ) | |||||||
|
Dividend to stockholders
|
(20,013 | ) | (20,001 | ) | (49,953 | ) | ||||||
|
Net cash provided by (used for) financing activities
|
32,313 | (97,155 | ) | (135,460 | ) | |||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
2,116 | 1,393 | (7,636 | ) | ||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(1,078 | ) | 59,992 | 54,898 | ||||||||
|
Beginning cash and cash equivalents
|
270,804 | 210,812 | 155,914 | |||||||||
|
Ending cash and cash equivalents
|
$ | 269,726 | $ | 270,804 | $ | 210,812 | ||||||
|
Supplemental disclosure of cash flow information:
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
$ | 147,237 | $ | 135,576 | $ | 154,103 | ||||||
|
Income taxes
|
52,912 | 56,922 | 63,107 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
49
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
| NOTE 1: | SIGNIFICANT ACCOUNTING POLICIES |
Nature of
Operations
Levi Strauss & Co. (the “Company”) is one of
the world’s leading branded apparel companies. The Company
designs and markets jeans, casual and dress pants, tops, skirts,
jackets, footwear and related accessories, for men, women and
children under the
Levi’s
®
,
Dockers
®
,
Signature by Levi Strauss &
Co.
tm
and
Denizen
tm
brands. The Company markets its products in three geographic
regions: Americas, Europe and Asia Pacific.
Basis of
Presentation and Principles of Consolidation
The consolidated financial statements of the Company and its
wholly-owned and majority-owned foreign and domestic
subsidiaries are prepared in conformity with generally accepted
accounting principles in the United States (“U.S.”).
All significant intercompany balances and transactions have been
eliminated. The Company is privately held primarily by
descendants of the family of its founder, Levi Strauss, and
their relatives.
The Company’s fiscal year ends on the last Sunday of
November in each year, although the fiscal years of certain
foreign subsidiaries are fixed at November 30 due to local
statutory requirements. Apart from these subsidiaries, each
quarter of fiscal years 2010, 2009 and 2008 consists of
13 weeks, with the exception of the fourth quarter of 2008,
which consisted of 14 weeks. All references to years relate
to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date
of these financial statements.
In 2010, the Company became subject to disclosure provisions
which require that amounts attributable to noncontrolling
interests (formerly referred to as “minority
interests”) be clearly identified and presented separately
from the Company’s interests in the consolidated financial
statements. Accordingly, prior-year amounts relating to the
16.4% noncontrolling interest in Levi Strauss Japan K.K., the
Company’s Japanese subsidiary, have been reclassified to
conform to the new presentation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and the related notes to consolidated financial
statements. Estimates are based upon historical factors, current
circumstances and the experience and judgment of the
Company’s management. Management evaluates its assumptions
and estimates on an ongoing basis and may employ outside experts
to assist in its evaluations. Changes in such estimates, based
on more accurate future information, or different assumptions or
conditions, may affect amounts reported in future periods.
Cash and
Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash
equivalents. Cash equivalents are stated at fair value.
Restricted
Cash
Restricted cash primarily relates to required cash deposits for
customs and rental guarantees to support the Company’s
international operations.
50
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Accounts
Receivable, Net
The Company extends credit to its wholesale customers that
satisfy pre-defined credit criteria. Accounts receivable, which
includes receivables related to the Company’s net sales and
licensing revenues, are recorded net of an allowance for
doubtful accounts. The Company estimates the allowance for
doubtful accounts based upon an analysis of the aging of
accounts receivable at the date of the consolidated financial
statements, assessments of collectability based on historic
trends, customer-specific circumstances, and an evaluation of
economic conditions.
Inventory
Valuation
The Company values inventories at the lower of cost or market
value. Inventory cost is determined using the
first-in
first-out method. The Company includes product costs, labor and
related overhead, sourcing costs, inbound freight, internal
transfers, and the cost of operating its remaining manufacturing
facilities, including the related depreciation expense, in the
cost of inventories. The Company estimates quantities of
slow-moving and obsolete inventory, by reviewing on-hand
quantities, outstanding purchase obligations and forecasted
sales. The Company determines inventory market values by
estimating expected selling prices based on the Company’s
historical recovery rates for slow-moving and obsolete inventory
and other factors, such as market conditions, expected channel
of distribution and current consumer preferences.
Income
Tax Assets and Liabilities
The Company is subject to income taxes in both the U.S. and
numerous foreign jurisdictions. The Company computes its
provision for income taxes using the asset and liability method,
under which deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of
assets and liabilities and for operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using the currently enacted tax rates that are expected to apply
to taxable income for the years in which those tax assets and
liabilities are expected to be realized or settled. Significant
judgments are required in order to determine the realizability
of these deferred tax assets. In assessing the need for a
valuation allowance, the Company’s management evaluates all
significant available positive and negative evidence, including
historical operating results, estimates of future taxable income
and the existence of prudent and feasible tax planning
strategies.
The Company does not recognize deferred taxes with respect to
temporary differences between the book and tax bases in its
investments in foreign subsidiaries, unless it becomes apparent
that these temporary differences will reverse in the foreseeable
future.
The Company continuously reviews issues raised in connection
with all ongoing examinations and open tax years to evaluate the
adequacy of its liabilities. Beginning in the first quarter of
2008, the Company evaluates uncertain tax positions under a
two-step approach. The first step is to evaluate the uncertain
tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not
that the position will be sustained upon examination based on
its technical merits. The second step, for those positions that
meet the recognition criteria, is to measure the tax benefit as
the largest amount that is more than fifty percent likely to be
realized. The Company believes that its recorded tax liabilities
are adequate to cover all open tax years based on its
assessment. This assessment relies on estimates and assumptions
and involves significant judgments about future events. To the
extent that the Company’s view as to the outcome of these
matters change, the Company will adjust income tax expense in
the period in which such determination is made. The Company
classifies interest and penalties related to income taxes as
income tax expense.
51
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Property,
Plant and Equipment
Property, plant and equipment are carried at cost, less
accumulated depreciation. The cost is depreciated on a
straight-line basis over the estimated useful lives of the
related assets. Certain costs relating to internal-use software
development are capitalized when incurred during the application
development phase. Buildings are depreciated over 20 to
40 years, and leasehold improvements are depreciated over
the lesser of the life of the improvement or the initial lease
term. Machinery and equipment includes furniture and fixtures,
automobiles and trucks, and networking communication equipment,
and is depreciated over a range from three to 20 years.
Capitalized internal-use software is depreciated over periods
ranging from three to seven years.
Goodwill
and Other Intangible Assets
Goodwill resulted primarily from a 1985 acquisition of the
Company by Levi Strauss Associates Inc., a former parent company
that was subsequently merged into the Company in 1996, and the
Company’s 2009 acquisitions. Goodwill is not amortized;
intangible assets are comprised of owned trademarks with
indefinite useful lives which are not being amortized and
acquired contractual rights and customers lists with finite
lives which are being amortized over periods ranging from two to
eight years.
Impairment
The Company reviews its goodwill and other
non-amortized
intangible assets for impairment annually in the fourth quarter
of its fiscal year, or more frequently as warranted by events or
changes in circumstances which indicate that the carrying amount
may not be recoverable. In the Company’s impairment tests,
the Company uses a two-step approach. In the first step, the
Company compares the carrying value of the applicable asset or
reporting unit to its fair value, which the Company estimates
using a discounted cash flow analysis or by comparison with the
market values of similar assets. If the carrying amount of the
asset or reporting unit exceeds its estimated fair value, the
Company performs the second step, and determines the impairment
loss, if any, as the excess of the carrying value of the
goodwill or intangible asset over its fair value.
The Company reviews its other long-lived assets for impairment
whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. If the
carrying amount of an asset exceeds the expected future
undiscounted cash flows, the Company measures and records an
impairment loss for the excess of the carrying value of the
asset over its fair value.
To determine the fair value of impaired assets, the Company
utilizes the valuation technique or techniques deemed most
appropriate based on the nature of the impaired asset and the
data available, which may include the use of quoted market
prices, prices for similar assets or other valuation techniques
such as discounted future cash flows or earnings.
Debt
Issuance Costs
The Company capitalizes debt issuance costs, which are included
in “Other assets” in the Company’s consolidated
balance sheets. These costs are amortized using the effective
interest method. Amortization of debt issuance costs is included
in “Interest expense” in the consolidated statements
of income.
Deferred
Rent
The Company is obligated under operating leases of property for
manufacturing, finishing and distribution facilities, office
space, retail stores and equipment. Rental expense relating to
operating leases are recognized on a straight-line basis over
the lease term after consideration of lease incentives and
scheduled rent escalations beginning as of the date the Company
takes physical possession or control of the property.
Differences between
52
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
rental expense and actual rental payments are recorded as
deferred rent liabilities included in “Other accrued
liabilities” and “Other long-term liabilities” on
the consolidated balance sheets.
Fair
Value of Financial Instruments
The fair values of the Company’s financial instruments
reflect the amounts that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). The
fair value estimates presented in this report are based on
information available to the Company as of November 28,
2010, and November 29, 2009.
The carrying values of cash and cash equivalents, trade
receivables and short-term borrowings approximate fair value.
The Company has estimated the fair value of its other financial
instruments using the market and income approaches. Rabbi trust
assets, forward foreign exchange contracts and the interest rate
swap contract are carried at their fair values. Notes, loans and
borrowings under the Company’s credit facilities are
carried at historical cost and adjusted for amortization of
premiums or discounts, foreign currency fluctuations and
principal payments.
Pension
and Postretirement Benefits
The Company has several non-contributory defined benefit
retirement plans covering eligible employees. The Company also
provides certain health care benefits for U.S. employees
who meet age, participation and length of service requirements
at retirement. In addition, the Company sponsors other
retirement or post-employment plans for its foreign employees in
accordance with local government programs and requirements. The
Company retains the right to amend, curtail or discontinue any
aspect of the plans, subject to local regulations.
The Company recognizes either an asset or a liability for any
plan’s funded status in its consolidated balance sheets.
The Company measures changes in funded status using actuarial
models which use an attribution approach that generally spreads
individual events over the estimated service lives of the
employees in the plan. The attribution approach assumes that
employees render service over their service lives on a
relatively smooth basis and as such, presumes that the income
statement effects of pension or postretirement benefit plans
should follow the same pattern. The Company’s policy is to
fund its retirement plans based upon actuarial recommendations
and in accordance with applicable laws, income tax regulations
and credit agreements. Net pension and postretirement benefit
income or expense is generally determined using assumptions
which include expected long-term rates of return on plan assets,
discount rates, compensation rate increases and medical trend
rates. The Company considers several factors including actual
historical rates, expected rates and external data to determine
the assumptions used in the actuarial models.
Pension benefits are primarily paid through trusts funded by the
Company. The Company pays postretirement benefits to the
healthcare service providers on behalf of the plan’s
participants.
Employee
Incentive Compensation
The Company maintains short-term and long-term employee
incentive compensation plans. These plans are intended to reward
eligible employees for their contributions to the Company’s
short-term and long-term success. Provisions for employee
incentive compensation are recorded in “Accrued salaries,
wages and employee benefits” and “Long-term employee
related benefits” in the Company’s consolidated
balance sheets. The Company accrues the related compensation
expense over the period of the plan and changes in the
liabilities for these incentive plans generally correlate with
the Company’s financial results and projected future
financial performance.
53
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Stock-Based
Compensation
The Company has stock-based incentive plans which reward certain
employees and directors with cash or equity. Compensation cost
for these awards is estimated based on the number of awards that
are expected to vest. Compensation cost for equity awards is
measured based on the fair value at the grant date, while
liability award expense is measured and adjusted based on the
fair value at the end of each quarter. No compensation cost is
ultimately recognized for awards which are unvested and
forfeited at an employees’ termination date or for
liability awards which are
out-of-the-money
at the award expiration date. Compensation cost is recognized on
a straight-line basis over the period that an employee provides
service for that award, which generally is the vesting period.
The Company’s common stock is not listed on any established
stock exchange. Accordingly, the stock’s fair market value
is determined by the Board based upon a valuation performed by
an independent third-party, Evercore Group LLC
(“Evercore”). Determining the fair value of the
Company’s stock requires complex and subjective judgments.
The valuation process includes comparison of the Company’s
historical and estimated future financial results with selected
publicly-traded companies and application of an appropriate
discount for the illiquidity of the stock to derive the fair
value of the stock. The Company uses this valuation for, among
other things, making determinations under its stock-based
compensation plans, such as the grant date fair value of awards.
The fair value of equity awards granted to employees is
estimated on the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option pricing model requires
the input of highly subjective assumptions including volatility.
Due to the fact that the Company’s common stock is not
publicly traded, the computation of expected volatility is based
on the average of the historical and implied volatilities, over
the expected life of the awards, of comparable companies from a
representative peer group of publicly traded entities, selected
based on industry and financial attributes. Other assumptions
include expected life, risk-free rate of interest and dividend
yield. Expected life is computed using the simplified method.
The risk-free interest rate is based on zero coupon
U.S. Treasury bond rates corresponding to the expected life
of the awards. Dividend assumptions are based on historical
experience.
The fair value of equity awards granted to directors is based on
the fair value of the common stock at the date of grant. The
fair value of liability awards granted to employees is also
based on the Black-Scholes option pricing model and is
calculated based on the current common stock value and
assumptions at each quarter end.
Due to the job function of the award recipients, the Company has
included stock-based compensation cost in “Selling, general
and administrative expenses” in the consolidated statements
of income.
Self-Insurance
The Company self-insures, up to certain limits, workers’
compensation risk and employee and eligible retiree medical
health benefits. The Company carries insurance policies covering
claim exposures which exceed predefined amounts, both per
occurrence and in the aggregate, for all workers’
compensation claims and for the medical claims of active
employees as well as those salaried retirees who retired after
June 1, 2001. Accruals for losses are made based on the
Company’s claims experience and actuarial assumptions
followed in the insurance industry, including provisions for
incurred but not reported losses.
Derivative
Financial Instruments and Hedging Activities
The Company recognizes all derivatives as assets and liabilities
at their fair values. The Company may use derivatives and
establish programs from time to time to manage foreign currency
and interest rate exposures that are sensitive to changes in
market conditions. The instruments that we designate or that
qualify for hedge accounting treatment hedge the Company’s
net investment position in certain of its foreign subsidiaries.
For these instruments, the Company documents the hedge
designation by identifying the hedging instrument, the nature of
the risk being
54
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
hedged and the approach for measuring hedge ineffectiveness. The
ineffective portions of hedges are recorded in “Other
income (expense), net” in the Company’s consolidated
statements of income. The gains and losses on the instruments
that we designate and that qualify for hedge accounting
treatment are recorded in “Accumulated other comprehensive
loss” in the Company’s consolidated balance sheets
until the underlying has been settled and is then reclassified
to earnings. Changes in the fair values of the derivative
instruments that we do not designate or that do not qualify for
hedge accounting are recorded in “Other income (expense),
net” or “Interest expense” in the Company’s
consolidated statements of income to reflect the economic risk
being mitigated.
Foreign
Currency
The functional currency for most of the Company’s foreign
operations is the applicable local currency. For those
operations, assets and liabilities are translated into
U.S. Dollars using period-end exchange rates, income and
expenses are translated at average monthly exchange rates, and
equity accounts are translated at historical rates. Net changes
resulting from such translations are recorded as a component of
translation adjustments in “Accumulated other comprehensive
income (loss)” in the Company’s consolidated balance
sheets.
The U.S. Dollar is the functional currency for foreign
operations in countries with highly inflationary economies. The
translation adjustments for these entities, as applicable, are
included in “Other income (expense), net” in the
Company’s consolidated statements of income.
Foreign currency transactions are transactions denominated in a
currency other than the entity’s functional currency. At
each balance sheet date, each entity remeasures the recorded
balances related to foreign-currency transactions using the
period-end exchange rate. Gains or losses arising from the
remeasurement of these balances are recorded in “Other
income (expense), net” in the Company’s consolidated
statements of income. In addition, at the settlement date of
foreign currency transactions, foreign currency gains and losses
are recorded in “Other income (expense), net” in the
Company’s consolidated statements of income to reflect the
difference between the rate effective at the settlement date and
the historical rate at which the transaction was originally
recorded.
Noncontrolling
Interest
Noncontrolling interest includes a 16.4% minority interest of
third parties in Levi Strauss Japan K.K., the Company’s
Japanese subsidiary.
Stockholders’
Deficit
The accumulated deficit component of stockholders’ deficit
at November 29, 2009, and prior, primarily resulted from a
1996 recapitalization transaction in which the Company’s
stockholders created new long-term governance arrangements,
including a voting trust and stockholders’ agreement. As a
result, shares of stock of a former parent company, Levi Strauss
Associates Inc., including shares held under several employee
benefit and compensation plans, were converted into the right to
receive cash. The funding for the cash payments in this
transaction was provided in part by cash on hand and in part
from proceeds of approximately $3.3 billion of borrowings
under bank credit facilities.
Revenue
Recognition
Net sales is primarily comprised of sales of products to
wholesale customers, including franchised stores, and direct
sales to consumers at the Company’s company-operated and
online stores and at the Company’s company-operated
shop-in-shops
located within department stores. The Company recognizes revenue
on sale of product when the goods are shipped or delivered and
title to the goods passes to the customer provided that: there
are no uncertainties regarding customer acceptance; persuasive
evidence of an arrangement exists; the sales price is fixed or
determinable; and collectability is reasonably assured. The
revenue is recorded net of an allowance for estimated
55
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
returns, discounts and retailer promotions and other similar
incentives. Licensing revenues from the use of the
Company’s trademarks in connection with the manufacturing,
advertising, and distribution of trademarked products by
third-party licensees are earned and recognized as products are
sold by licensees based on royalty rates as set forth in the
licensing agreements.
The Company recognizes allowances for estimated returns in the
period in which the related sale is recorded. The Company
recognizes allowances for estimated discounts, retailer
promotions and other similar incentives at the later of the
period in which the related sale is recorded or the period in
which the sales incentive is offered to the customer. The
Company estimates non-volume based allowances based on
historical rates as well as customer and product-specific
circumstances. Sales and value-added taxes collected from
customers and remitted to governmental authorities are presented
on a net basis in the consolidated statements of income.
Net sales to the Company’s ten largest customers totaled
approximately 33%, 36% and 37% of net revenues for 2010, 2009
and 2008, respectively. No customer represented 10% or more of
net revenues in any of these years.
Cost of
Goods Sold
Cost of goods sold includes the expenses incurred to acquire and
produce inventory for sale, including product costs, labor and
related overhead, sourcing costs, inbound freight, internal
transfers, and the cost of operating the Company’s
remaining manufacturing facilities, including the related
depreciation expense. Costs relating to the Company’s
licensing activities are included in “Selling, general and
administrative expenses” in the consolidated statements of
income.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses are primarily
comprised of costs relating to advertising, marketing, selling,
distribution, information technology and other corporate
functions. Selling costs include all occupancy costs associated
with company-operated stores and with the Company’s
company-operated
shop-in-shops
located within department stores. The Company expenses
advertising costs as incurred. For 2010, 2009 and 2008, total
advertising expense was $327.8 million, $266.1 million
and $297.9 million, respectively. Distribution costs
include costs related to receiving and inspection at
distribution centers, warehousing, shipping to the
Company’s customers, handling and certain other activities
associated with the Company’s distribution network. These
expenses totaled $185.1 million, $185.7 million and
$215.8 million for 2010, 2009 and 2008, respectively.
Recently
Issued Accounting Standards
The following recently issued accounting standards have been
grouped by their required effective dates for the Company:
First
Quarter of 2011
| • | In October 2009 the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force),” (“ASU 2009-13”). ASU 2009-13 provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocation. Additionally, ASU 2009-13 requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price, eliminates the residual method and requires an entity to allocate revenue using the relative selling price method. ASU 2009-13 may be applied retrospectively or prospectively for new or materially modified |
56
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
| arrangements and early adoption is permitted. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements. |
| NOTE 2: | PROPERTY, PLANT AND EQUIPMENT |
The components of property, plant and equipment
(“PP&E”) were as follows:
|
November 28,
|
November 29,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Land
|
$ | 29,728 | $ | 30,118 | ||||
|
Buildings and leasehold improvements
|
406,644 | 380,601 | ||||||
|
Machinery and equipment
|
493,325 | 493,152 | ||||||
|
Capitalized internal-use software
|
186,905 | 158,630 | ||||||
|
Construction in progress
|
55,259 | 32,460 | ||||||
|
Subtotal
|
1,171,861 | 1,094,961 | ||||||
|
Accumulated depreciation
|
(683,258 | ) | (664,891 | ) | ||||
|
PP&E, net
|
$ | 488,603 | $ | 430,070 | ||||
Depreciation expense for the years ended November 28, 2010,
November 29, 2009, and November 30, 2008, was
$88.9 million, $76.8 million and $78.0 million,
respectively.
Construction in progress at November 28, 2010, and
November 29, 2009, primarily related to the installation of
various information technology systems and leasehold
improvements.
Impairment charges in 2010 were not material; the Company
recorded impairment charges of $11.5 million and
$16.1 million in 2009 and 2008, respectively, to reduce the
carrying values of certain long-lived assets, primarily in the
Americas for leasehold improvements in company-operated stores,
to their estimated fair values. The impairment charges were
recorded as “Selling, general and administrative
expenses” in the Company’s consolidated statements of
income. The remaining fair values of the impaired stores at
November 28, 2010, were not material.
| NOTE 3: | GOODWILL AND OTHER INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill by business
segment for the years ended November 28, 2010, and
November 29, 2009, were as follows:
|
Asia
|
||||||||||||||||
| Americas | Europe | Pacific | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Balance, November 30, 2008
|
$ | 199,905 | $ | 3,038 | $ | 1,720 | $ | 204,663 | ||||||||
|
Additions
|
7,513 | 24,427 | — | 31,940 | ||||||||||||
|
Foreign currency fluctuation
|
5 | 4,615 | 545 | 5,165 | ||||||||||||
|
Balance, November 29, 2009
|
$ | 207,423 | $ | 32,080 | $ | 2,265 | $ | 241,768 | ||||||||
|
Additions
|
— | 2,115 | — | 2,115 | ||||||||||||
|
Foreign currency fluctuation
|
4 | (2,592 | ) | 177 | (2,411 | ) | ||||||||||
|
Balance, November 28, 2010
|
$ | 207,427 | $ | 31,603 | $ | 2,442 | $ | 241,472 | ||||||||
57
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
The increase in goodwill in Europe in 2009 primarily resulted
from the Company’s acquisition of a former distributor,
which distributes and markets
Levi’s
®
products within the Russian Federation. The Company acquired a
51% ownership interest in the business venture in December 2008,
and acquired the remaining 49% in September 2009. Total purchase
consideration for the acquisition was approximately
$32 million. The Company allocated the purchase price to
the fair values of the tangible assets and intangible
contractual rights acquired and the liabilities assumed at the
acquisition date, with the difference of approximately
$20 million recorded as goodwill. Cash paid for the
acquisition, net of cash acquired, was $20 million.
The increase in goodwill in Europe in 2009 also reflects the
Company’s July 1, 2009, acquisition of a former
licensee for a base purchase price of $21 million, plus a
purchase price adjustment for the acquired net asset value based
on the final balance sheet of the acquired business, estimated
at $16 million. The Company initially allocated the
purchase price to the fair values of the tangible assets,
intangible customer lists and contractual rights acquired, and
the liabilities assumed at the acquisition date, with the
difference of approximately $4 million recorded as
goodwill. During 2009, the Company made payments totaling
$16 million, net of cash acquired, in partial payment for
this acquisition. The remaining purchase consideration was paid
in the second quarter of 2010 after the finalization of the
purchase price, resulting in additional goodwill of
approximately $2 million.
The increase in goodwill in the Americas resulted from the
Company’s July 13, 2009, acquisition of the operating
rights to 73
Levi’s
®
and
Dockers
®
outlet stores from Anchor Blue Retail Group, Inc., who
previously operated the stores under a license agreement with
the Company. The Company allocated the $62 million cost of
the acquisition to the fair values of the tangible assets and
intangible contractual rights acquired and the liabilities
assumed at the acquisition date, with the difference of
approximately $7 million recorded as goodwill.
The impact of the Company’s acquisitions during 2009 on the
Company’s results of operations, as if the acquisitions had
been completed as of the beginning of the periods presented, is
not significant.
Other intangible assets, net, were as follows:
| November 28, 2010 | November 29, 2009 | |||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||
| Value | Amortization | Total | Value | Amortization | Total | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Non-amortized
intangible assets:
|
||||||||||||||||||||||||
|
Trademarks
|
$ | 42,743 | $ | — | $ | 42,743 | $ | 42,743 | $ | — | $ | 42,743 | ||||||||||||
|
Amortized intangible assets:
|
||||||||||||||||||||||||
|
Acquired contractual rights
|
45,712 | (17,765 | ) | 27,947 | 46,529 | (6,019 | ) | 40,510 | ||||||||||||||||
|
Customer lists
|
20,037 | (6,075 | ) | 13,962 | 22,340 | (2,395 | ) | 19,945 | ||||||||||||||||
| $ | 108,492 | $ | (23,840 | ) | $ | 84,652 | $ | 111,612 | $ | (8,414 | ) | $ | 103,198 | |||||||||||
The estimated useful lives of the Company’s amortized
intangible assets range from two to eight years. For the year
ended November 28, 2010, amortization of these intangible
assets was $14.8 million, compared to $7.8 million in
2009. The amortization of these intangible assets, which is
included in “Selling, general and administrative
expenses” in the Company’s consolidated statements of
income, in each of the five succeeding fiscal years is
approximately $12.8 million in 2011, $12.2 million in
2012, $11.0 million in 2013, $2.8 million in 2014, and
$2.5 million in 2015.
As of November 28, 2010, there was no impairment to the
carrying value of the Company’s goodwill or
non-amortized
intangible assets.
58
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
| NOTE 4: | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following table presents the Company’s financial
instruments that are carried at fair value.
| November 28, 2010 | November 29, 2009 | |||||||||||||||||||||||
|
Fair Value Estimated
|
Fair Value Estimated
|
|||||||||||||||||||||||
| Using | Using | |||||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 1
|
Level 2
|
|||||||||||||||||||||
| Fair Value | Inputs (1) | Inputs (2) | Fair Value | Inputs (1) | Inputs (2) | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Financial assets carried at fair value
|
||||||||||||||||||||||||
|
Rabbi trust assets
|
$ | 18,316 | $ | 18,316 | $ | — | $ | 16,855 | $ | 16,855 | $ | — | ||||||||||||
|
Forward foreign exchange contracts,
net
(3)
|
1,385 | — | 1,385 | 721 | — | 721 | ||||||||||||||||||
|
Total financial assets carried at fair value
|
$ | 19,701 | $ | 18,316 | $ | 1,385 | $ | 17,576 | $ | 16,855 | $ | 721 | ||||||||||||
|
Financial liabilities carried at fair value
|
||||||||||||||||||||||||
|
Forward foreign exchange contracts,
net
(3)
|
$ | 5,003 | $ | — | $ | 5,003 | $ | 14,519 | $ | — | $ | 14,519 | ||||||||||||
|
Interest rate contracts, net
|
— | — | — | 1,451 | — | 1,451 | ||||||||||||||||||
|
Total financial liabilities carried at fair value
|
$ | 5,003 | $ | — | $ | 5,003 | $ | 15,970 | $ | — | $ | 15,970 | ||||||||||||
| (1) | Fair values estimated using Level 1 inputs, which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Rabbi trust assets consist of a diversified portfolio of equity, fixed income and other securities. See Note 12 for more information on rabbi trust assets. | |
| (2) | Fair values estimated using Level 2 inputs are inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and credit default swap prices. For the interest rate swap, for which the Company’s fair value estimate incorporates discounted future cash flows using a forward curve mid-market pricing convention, inputs include LIBOR forward rates and credit default swap prices. | |
| (3) | The Company’s forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements. These agreements are signed between the Company and each respective financial institution, and permit the net-settlement of forward foreign exchange contracts on a per institution basis. |
59
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
The following table presents the carrying value —
including accrued interest as applicable — and
estimated fair value of the Company’s financial instruments
that are carried at adjusted historical cost.
| November 28, 2010 | November 29, 2009 | |||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
| Value | Fair Value (1) | Value | Fair Value (1) | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Financial liabilities carried at adjusted historical cost
|
||||||||||||||||
|
Senior revolving credit facility
|
$ | 108,482 | $ | 107,129 | $ | 108,489 | $ | 103,618 | ||||||||
|
8.625% Euro senior notes due
2013
(2)
|
— | — | 379,935 | 379,935 | ||||||||||||
|
Senior term loan due 2014
|
324,423 | 311,476 | 323,497 | 291,163 | ||||||||||||
|
9.75% senior notes due
2015
(2)
|
— | — | 462,704 | 485,572 | ||||||||||||
|
8.875% senior notes due 2016
|
355,004 | 373,379 | 355,120 | 366,495 | ||||||||||||
|
4.25% Yen-denominated Eurobonds due
2016
(2)
|
109,429 | 98,063 | 232,494 | 197,448 | ||||||||||||
|
7.75% Euro senior notes due
2018
(2)
|
401,982 | 407,993 | — | — | ||||||||||||
|
7.625% senior notes due
2020
(2)
|
526,557 | 542,307 | — | — | ||||||||||||
|
Short-term borrowings
|
46,722 | 46,722 | 19,027 | 19,027 | ||||||||||||
|
Total financial liabilities carried at adjusted historical cost
|
$ | 1,872,599 | $ | 1,887,069 | $ | 1,881,266 | $ | 1,843,258 | ||||||||
| (1) | Fair value estimate incorporates mid-market price quotes. | |
| (2) | Reflects the Company’s refinancing activities during the second quarter of 2010. Please see Note 6 for additional information. |
| NOTE 5: | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
The Company’s foreign currency management objective is to
minimize the effect of fluctuations in foreign exchange rates on
nonfunctional currency cash flows of the Company and its
subsidiaries and selected assets or liabilities of the Company
and its subsidiaries without exposing the Company to additional
risk associated with transactions that could be regarded as
speculative. Forward exchange contracts on various currencies
are entered into to manage foreign currency exposures associated
with certain product sourcing activities, some intercompany
sales, foreign subsidiaries’ royalty payments, interest
payments, earnings repatriations, net investment in foreign
operations and funding activities. The Company manages certain
forecasted foreign currency exposures and uses a centralized
currency management operation to take advantage of potential
opportunities to naturally offset foreign currency exposures
against each other. The Company manages the currency risk
associated with certain forecasted cash flows periodically and
only partially manages the timing mismatch between its
forecasted exposures and the related financial instruments used
to mitigate the currency risk. The Company designates its
outstanding Euro senior notes and a portion of its outstanding
Yen-denominated Eurobonds as net investment hedges to manage
foreign currency exposures in its foreign operations. The
Company does not apply hedge accounting to its derivative
transactions. As of November 28, 2010, the Company had
forward foreign exchange contracts to buy $623.7 million
and to sell $392.5 million against various foreign
currencies. These contracts are at various exchange rates and
expire at various dates through February 2012.
60
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
The table below provides data about the carrying values of
derivative and non-derivative instruments:
| November 28, 2010 | November 29, 2009 | |||||||||||||||||||||||
| Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||||||||||
|
Derivative
|
Derivative
|
|||||||||||||||||||||||
|
Carrying
|
Carrying
|
Net Carrying
|
Carrying
|
Carrying
|
Net Carrying
|
|||||||||||||||||||
| Value | Value | Value | Value | Value | Value | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Derivatives not designated as hedging instruments
|
||||||||||||||||||||||||
|
Forward foreign exchange
contracts
(1)
|
$ | 7,717 | $ | (6,332 | ) | $ | 1,385 | $ | 1,189 | $ | (468 | ) | $ | 721 | ||||||||||
|
Forward foreign exchange
contracts
(2)
|
4,266 | (9,269 | ) | (5,003 | ) | 5,675 | (20,194 | ) | (14,519 | ) | ||||||||||||||
|
Interest rate
contracts
(2)
|
— | — | — | — | (1,451 | ) | (1,451 | ) | ||||||||||||||||
|
Total derivatives not designated as hedging instruments
|
$ | 11,983 | $ | (15,601 | ) | $ | 6,864 | $ | (22,113 | ) | ||||||||||||||
|
Non-derivatives designated as hedging instruments
|
||||||||||||||||||||||||
|
4.25% Yen-denominated Eurobonds due 2016
|
$ | — | $ | (61,075 | ) | $ | — | $ | (92,684 | ) | ||||||||||||||
|
7.75% Euro senior notes due 2018
|
— | (400,740 | ) | — | (374,641 | ) | ||||||||||||||||||
|
Total non-derivatives designated as hedging instruments
|
$ | — | $ | (461,815 | ) | $ | — | $ | (467,325 | ) | ||||||||||||||
| (1) | Included in “Other current assets” on the Company’s consolidated balance sheets. | |
| (2) | Included in “Other accrued liabilities” on the Company’s consolidated balance sheets. |
61
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
The table below provides data about the amount of gains and
losses related to derivative instruments and non-derivative
instruments designated as net investment hedges included in
“Accumulated other comprehensive loss”
(“AOCI”) on the Company’s consolidated balance
sheets, and in “Other income (expense), net” in the
Company’s consolidated statements of income:
|
Gain (Loss)
|
||||||||||||||||||||
|
Gain (Loss)
|
Recognized in Other Income (Expense), net
|
|||||||||||||||||||
|
Recognized in AOCI
|
(Ineffective Portion and Amount
|
|||||||||||||||||||
| (Effective Portion) | Excluded from Effectiveness Testing) | |||||||||||||||||||
|
As of
|
As of
|
Year Ended | ||||||||||||||||||
|
November 28,
|
November 29,
|
November 28,
|
November 29,
|
November 30,
|
||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Forward foreign exchange contracts
|
$ | 4,637 | $ | 4,637 | $ | — | $ | — | $ | — | ||||||||||
|
4.25% Yen-denominated Eurobonds due 2016
|
(24,377 | ) | (23,621 | ) | 2,254 | (13,094 | ) | (14,815 | ) | |||||||||||
|
7.75% Euro senior notes due 2018
|
(23,671 | ) | (61,570 | ) | — | — | — | |||||||||||||
|
Cumulative income taxes
|
17,022 | 31,237 | ||||||||||||||||||
|
Total
|
$ | (26,389 | ) | $ | (49,317 | ) | ||||||||||||||
The table below provides data about the amount of gains and
losses related to derivatives not designated as hedging
instruments included in “Other income (expense), net”
in the Company’s consolidated statements of income:
| Gain (Loss) During | ||||||||||||
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Forward foreign exchange contracts:
|
||||||||||||
|
Realized
|
$ | (16,342 | ) | $ | (50,760 | ) | $ | 53,499 | ||||
|
Unrealized
|
10,163 | (18,794 | ) | 10,944 | ||||||||
|
Total
|
$ | (6,179 | ) | $ | (69,554 | ) | $ | 64,443 | ||||
62
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
| NOTE 6: | DEBT |
|
November 28,
|
November 29,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Long-term debt
|
||||||||
|
Secured:
|
||||||||
|
Senior revolving credit facility
|
$ | 108,250 | $ | 108,250 | ||||
|
Total secured
|
108,250 | 108,250 | ||||||
|
Unsecured:
|
||||||||
|
8.625% Euro senior notes due 2013
|
— | 374,641 | ||||||
|
Senior term loan due 2014
|
323,676 | 323,340 | ||||||
|
9.75% senior notes due 2015
|
— | 446,210 | ||||||
|
8.875% senior notes due 2016
|
350,000 | 350,000 | ||||||
|
4.25% Yen-denominated Eurobonds due 2016
|
109,062 | 231,710 | ||||||
|
7.75% Euro senior notes due 2018
|
400,740 | — | ||||||
|
7.625% senior notes due 2020
|
525,000 | — | ||||||
|
Total unsecured
|
1,708,478 | 1,725,901 | ||||||
|
Less: current maturities
|
— | — | ||||||
|
Total long-term debt
|
$ | 1,816,728 | $ | 1,834,151 | ||||
|
Short-term debt
|
||||||||
|
Short-term borrowings
|
$ | 46,418 | $ | 18,749 | ||||
|
Current maturities of long-term debt
|
— | — | ||||||
|
Total short-term debt
|
$ | 46,418 | $ | 18,749 | ||||
|
Total long-term and short-term debt
|
$ | 1,863,146 | $ | 1,852,900 | ||||
Senior
Revolving Credit Facility
The Company is a party to an amended and restated senior secured
credit facility. The facility is an asset-based facility, in
which the borrowing availability varies according to the levels
of the Company’s domestic accounts receivable, inventory
and cash and investment securities deposited in secured accounts
with the administrative agent or other lenders. Subject to the
level of this borrowing base, the Company may make and repay
borrowings from time to time until the maturity of the facility.
The Company may make voluntary prepayments of borrowings at any
time and must make mandatory prepayments if certain events
occur, such as asset sales. The Company made required payments
of $70.9 million both in 2009 and in 2008. Other material
terms of the credit facility are discussed below.
Availability, interest and maturity.
The
maximum availability under the credit facility is
$750.0 million, including a $250.0 million trademark
tranche. The trademark tranche amortizes on a quarterly basis
based on a straight line two-year amortization schedule to a
residual value of 25% of the net orderly liquidation value of
the trademarks with no additional repayments required until
maturity so long as the remaining amount of the tranche does not
exceed such 25% valuation. The trademark tranche will be
borrowed on a first dollar drawn basis. As the trademark tranche
is repaid, the revolving tranche increases, up to a maximum of
$750.0 million when the trademark tranche is repaid in
full. The revolving portion of the credit facility initially
bears an interest rate of
63
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
LIBOR plus 150 basis points or base rate plus 25 basis
points subject to subsequent adjustments based on availability.
The trademark tranche bears an interest rate of LIBOR plus
250 basis points or base rate plus 125 basis points.
The credit facility matures on October 11, 2012, at which
time our total borrowings outstanding under the credit facility
become due.
Guarantees and security.
The Company’s
obligations under the senior secured revolving credit facility
are guaranteed by the Company’s domestic subsidiaries. The
senior secured revolving credit facility is collateralized by a
first-priority lien on domestic inventory and accounts
receivable, patents, certain U.S. trademarks associated
with the
Levi’s
®
brand, and other related intellectual property, 100% of the
equity interests in all domestic subsidiaries and other assets.
The aggregate carrying value of the collateralized assets
exceeds the total availability under the senior secured
revolving credit facility. The lien on the trademarks, but not
the other assets, will be released upon the full repayment of
the trademark tranche. In addition, the Company has the ability
to deposit cash or certain investment securities with the
administrative agent for the facility to secure the
Company’s reimbursement and other obligations with respect
to letters of credit. Such cash-collateralized letters of credit
are subject to lower letter of credit fees.
Covenants.
The senior secured revolving credit
facility contains customary covenants restricting the
Company’s activities as well as those of the Company’s
subsidiaries, including limitations on the Company’s, and
the Company’s domestic subsidiaries’, ability to sell
assets; engage in mergers; enter into capital leases or certain
leases not in the ordinary course of business; enter into
transactions involving related parties or derivatives; incur or
prepay indebtedness or grant liens or negative pledges on the
Company’s assets; make loans or other investments; pay
dividends or repurchase stock or other securities; guaranty
third-party obligations; and make changes in the Company’s
corporate structure. Some of these covenants are suspended if
unused availability exceeds certain minimum thresholds. In
addition, a minimum fixed charge coverage ratio of 1.0:1.0
arises when unused availability under the facility is less than
$100.0 million. As of November 28, 2010, the Company
had sufficient unused availability under the facility to exceed
all applicable minimum thresholds. This financial covenant will
be discontinued upon repayment in full and termination of the
trademark tranche described above and the implementation of an
unfunded availability reserve of $50.0 million.
Events of default.
The senior secured
revolving credit facility contains customary events of default,
including payment failures; failure to comply with covenants;
failure to satisfy other obligations under the credit agreements
or related documents; defaults in respect of other indebtedness;
bankruptcy, insolvency and inability to pay debts when due;
material judgments; pension plan terminations or specified
underfunding; substantial voting trust certificate or stock
ownership changes; specified changes in the composition of the
Company’s board of directors; and invalidity of the
guaranty or security agreements. The cross-default provisions in
the senior secured revolving credit facility apply if a default
occurs on other indebtedness in excess of $25.0 million and
the applicable grace period in respect of the indebtedness has
expired, such that the lenders of or trustee for the defaulted
indebtedness have the right to accelerate. If an event of
default occurs under the senior secured revolving credit
facility, the Company’s lenders may terminate their
commitments, declare immediately payable all borrowings under
the credit facility and foreclose on the collateral.
Senior
Notes due 2012
On September 19, 2007, the Company commenced a cash tender
offer for its remaining $525.0 million aggregate principal
amount of its then-existing 12.25% senior notes due 2012.
On October 18, 2007, the Company repurchased
$506.2 million, or 96.4%, of the aggregate principal amount
of the notes outstanding for a total cash consideration of
$566.9 million, consisting of the accrued and unpaid
interest, prepayment premiums, tender offer consideration,
applicable consent payments and other fees and expenses.
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
On March 25, 2008, the Company redeemed the remaining
$18.8 million face amount of the notes, excluding discount,
for a total cash consideration of $20.6 million, consisting
of accrued and unpaid interest, and other fees and expenses. The
total cash consideration was paid using cash on hand.
Euro
Notes due 2013
On March 11, 2005, the Company issued
€150.0 million in notes to qualified institutional
buyers. These notes were unsecured obligations that ranked
equally with all of the Company’s other existing and future
unsecured and unsubordinated debt. These notes would have
matured on April 1, 2013, and bore interest at 8.625% per
annum, payable semi-annually in arrears on April 1 and
October 1.
On March 17, 2006, the Company issued an additional
€100.0 million in Euro Notes due 2013 to qualified
institutional buyers. These notes had the same terms and are
part of the same series as the €150.0 million
aggregate principal amount of Euro Notes due 2013 the Company
issued in March 2005, except that these notes were offered at a
premium of 3.5%, or $4.2 million, which original issuance
premium was amortized over the term of the notes while still
outstanding. All of the issued Euro Notes due 2013 became
redeemable on April 1, 2009, in whole or in part, at once
or over time, at redemption prices specified in the indenture
governing the notes, after giving the required notice under the
indenture.
The Company redeemed all of the outstanding Euro Notes due 2013
in May 2010, as described below.
Covenants.
The indenture governing the Euro
Notes due 2013 contained covenants that limited the Company and
its subsidiaries’ ability to incur additional debt; pay
dividends or make other restricted payments; consummate
specified asset sales; enter into transactions with affiliates;
incur liens; impose restrictions on the ability of a subsidiary
to pay dividends or make payments to the Company and its
subsidiaries; merge or consolidate with any other person; and
sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the Company’s assets or its
subsidiaries’ assets.
Covenant suspension.
If these notes were to
receive and maintain an investment grade rating by both Standard
and Poor’s and Moody’s and the Company and its
subsidiaries are and remain in compliance with the indenture,
then the Company and its subsidiaries would not be required to
comply with specified covenants contained in the indenture.
Asset sales.
The indenture governing these
notes provided that the Company’s asset sales must be at
fair market value and the consideration must consist of at least
75% cash or cash equivalents or the assumption of liabilities.
The Company would be required to use the net proceeds from the
asset sale within 360 days after receipt either to repay
bank debt, with an equivalent permanent reduction in the
available commitment in the case of a repayment under the
Company’s senior secured revolving credit facility, or to
invest in additional assets in a business related to the
Company’s business. To the extent proceeds not so used
within the time period exceed $10.0 million, the Company
would be required to make an offer to purchase outstanding notes
at par plus accrued but unpaid interest, if any, to the date of
repurchase.
Change in control.
If the Company experienced
a change in control as defined in the indenture governing the
notes, then the Company would have been required under the
indenture to make an offer to repurchase the notes at a price
equal to 101% of the principal amount plus accrued and unpaid
interest, if any, to the date of repurchase.
Events of default.
The indenture governing
these notes contained customary events of default, including
failure to pay principal, failure to pay interest after a
30-day
grace
period, failure to comply with the merger, consolidation and
sale of property covenant, failure to comply with other
covenants in the indenture for a period of 30 days after
notice given to the Company, failure to satisfy certain
judgments in excess of $25.0 million after a
30-day
grace
period, and certain events involving bankruptcy, insolvency or
reorganization. The indenture also
65
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
contained a cross-acceleration event of default that applies if
debt of the Company or any restricted subsidiary in excess of
$25.0 million is accelerated or is not paid when due at
final maturity.
Use of proceeds.
The proceeds from the initial
issuance of Euro Notes due 2013 in March 2005 were used to
repurchase the Company’s then-existing 2008 notes and to
pay a portion of the fees, expenses and premiums payable in
connection with the March 2005 offering and 2008 note
repurchase. The proceeds from the additional issuance of 2013
Euro notes in March 2006, and the issuance of the senior notes
due 2016 plus cash on hand were used to prepay the remaining
balance of then-existing senior secured term loan of
$488.8 million.
Senior
Term Loan due 2014
On March 27, 2007, the Company entered into a senior
unsecured term loan agreement. The term loan consists of a
single borrowing of $325.0 million, net of a 0.75% discount
to the lenders. On April 4, 2007, the Company borrowed the
maximum available of $322.6 million under the term loan and
used the borrowings plus cash on hand of $66.4 million to
redeem all of its outstanding $380.0 million floating rate
senior notes due 2012 and to pay related redemption premiums,
transaction fees and expenses, and accrued interest of
$9.0 million. The term loan matures on April 4, 2014,
and bears interest at 2.25% over LIBOR or 1.25% over the base
rate. The term loan may not be prepaid during the first year but
thereafter may be prepaid without premium or penalty.
The covenants, events of default, asset sale, change of control,
and other terms of the term loan are comparable to those
contained in the indentures governing the Company’s Euro
Notes due 2013 described above, including the covenant
suspension term that was in effect at November 28, 2010,
and will remain in effect until such time as the Company obtains
the required investment grade rating.
Senior
Notes due 2015
Principal, interest and maturity.
On
December 22, 2004, the Company issued $450.0 million
in notes to qualified institutional buyers. These notes were
unsecured obligations that ranked equally with all of the
Company’s other existing and future unsecured and
unsubordinated debt. They were
10-year
notes that would have matured on January 15, 2015, and bore
interest at 9.75% per annum, payable semi-annually in arrears on
January 15 and July 15. Starting on January 15, 2010,
the notes became redeemable, in whole or in part, at once or
over time, at redemption prices specified in the indenture
governing the notes, after giving the required notice under the
indenture.
The covenants, events of default, asset sale, change of control,
covenant suspension and other terms of the notes were comparable
to those contained in the indentures governing the
Company’s Euro Notes due 2013 described above.
Use of proceeds — Repurchase of then-existing
senior notes due 2006.
The proceeds from this
issuance were used to repurchase and repay all of the
Company’s then-existing senior unsecured notes due 2006.
During the third quarter of 2008, the Company repurchased
$3.8 million of these notes on the open market for a net
gain of $0.2 million. The Company redeemed all of the
remaining outstanding Senior Notes due 2015 in May 2010, as
described below.
Senior
Notes due 2016
Principal, interest and maturity.
On
March 17, 2006, the Company issued $350.0 million in
notes to qualified institutional buyers. These notes are
unsecured obligations that rank equally with all of the
Company’s other existing and future unsecured and
unsubordinated debt. They are
10-year
notes maturing on April 1, 2016, and bear interest at
8.875% per annum, payable semi-annually in arrears on April 1
and October 1. The Company may redeem these notes, in whole
or in part, at any time prior to April 1, 2011, at a price
equal to 100% of the principal amount plus accrued and unpaid
interest, if any, to the date of redemption and a
“make-whole” premium. Starting on
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
April 1, 2011, the Company may redeem all or any portion of
the notes, at once or over time, at redemption prices specified
in the indenture governing the notes, after giving the required
notice under the indenture. These notes were offered at par.
Costs representing underwriting fees and other expenses of
$8.0 million are amortized over the term of the notes to
interest expense.
The covenants, events of default, asset sale, change of control,
and other terms of the notes are comparable to those contained
in the indentures governing the Company’s Euro Notes due
2013 described above, including the covenant suspension term
that was in effect at November 28, 2010, and will remain in
effect until such time as the Company obtains the required
investment grade rating.
Exchange offer.
In July 2006, after a required
exchange offer, all of the 2016 notes were exchanged for new
notes on identical terms, except that the new notes are
registered under the Securities Act of 1933.
Use of proceeds — Prepayment of term
loan.
In March 2006, the Company used the
proceeds of the additional Euro Notes due 2013 and the senior
notes due 2016 plus cash on hand to prepay the remaining balance
of the existing senior secured term loan of $488.8 million.
Yen-denominated
Eurobonds due 2016
In 1996, the Company issued ¥20 billion principal
amount Eurobonds (equivalent to approximately
$180.0 million at the time of issuance) due in November
2016, with interest payable at 4.25% per annum. The bond is
redeemable at the option of the Company at a make-whole
redemption price. The Company repurchased a portion of the
Yen-denominated Eurobonds due 2016 in May 2010, as described
below.
The agreement governing these bonds contains customary events of
default and restricts the Company’s ability and the ability
of its subsidiaries and future subsidiaries to incur liens;
engage in sale and leaseback transactions and engage in mergers
and sales of assets. The agreement contains a cross-acceleration
event of default that applies if any of the Company’s debt
in excess of $25.0 million is accelerated and the debt is
not discharged or acceleration rescinded within 30 days
after the Company’s receipt of a notice of default from the
fiscal agent or from the holders of at least 25% of the
principal amount of the bond.
Issuance
of Euro Senior Notes due 2018 and Senior Notes due 2020 and
Tender, Redemption and Partial Repurchase of Euro Notes due
2013, Senior Notes due 2015, and Yen-denominated Eurobonds due
2016
Euro Notes due 2018 and Senior Notes due
2020.
On May 6, 2010, the Company issued
€300.0 million in aggregate principal amount of 7.75%
Euro senior notes due 2018 (the “2018 Euro Notes”) and
$525.0 million in aggregate principal amount of
7.625% senior notes due 2020 (the “2020 Senior
Notes”) to qualified institutional buyers. The notes are
unsecured obligations that rank equally with all of the
Company’s other existing and future unsecured and
unsubordinated debt. The 2018 Euro Notes mature on May 15,
2018, and the 2020 Senior Notes mature on May 15, 2020.
Interest on the notes is payable semi-annually in arrears on May
15 and November 15, commencing on November 15, 2010.
The Company may redeem some or all of the 2018 Euro Notes prior
to May 15, 2014, and some or all of the 2020 Senior Notes
prior to May 15, 2015, each at a price equal to 100% of the
principal amount plus accrued and unpaid interest and a
“make-whole” premium; after these dates, the Company
may redeem all or any portion of the notes, at once or over
time, at redemption prices specified in the indenture governing
the notes, after giving the required notice under the indenture.
In addition, at any time prior to May 15, 2013, the Company
may redeem up to a maximum of 35% of the original aggregate
principal amount of each series of notes with the proceeds of
one or more public equity offerings at a redemption price of
107.750% and 107.625% of the principal amount of the 2018 Euro
Notes and 2020 Senior Notes, respectively, plus accrued and
unpaid interest, if any, to the date of redemption. Costs
representing underwriting fees and other expenses of
$17.5 million are amortized over the term of the notes to
interest expense.
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Covenants.
The indenture governing both notes
contains covenants that limit, among other things, the
Company’s and certain of the Company’s
subsidiaries’ ability to incur additional debt; make
certain restricted payments; consummate specified asset sales;
enter into transactions with affiliates; incur liens; impose
restrictions on the ability of its subsidiaries to pay dividends
or make payments to the Company and its restricted subsidiaries;
enter into sale and leaseback transactions; merge or consolidate
with another person; and dispose of all or substantially all of
the Company’s assets. The indenture provides for customary
events of default (subject in certain cases to customary grace
and cure periods), which include nonpayment, breach of covenants
in the indenture, payment defaults or acceleration of other
indebtedness, a failure to pay certain judgments and certain
events of bankruptcy and insolvency. Generally, if an event of
default occurs, the trustee under the indenture or holders of at
least 25% in principal amount of the then outstanding notes may
declare all notes to be due and payable immediately. Upon the
occurrence of a change in control (as defined in the indenture),
each holder of notes may require the Company to repurchase all
or a portion of the notes in cash at a price equal to 101% of
the principal amount of notes to be repurchased, plus accrued
and unpaid interest, if any, thereon to the date of purchase.
Exchange offer.
In accordance with a
registration rights agreement, the Company conducted an exchange
offer to allow holders to exchange the notes for new notes in
the same principal amount and with substantially identical
terms, except that the new notes were registered under the
Securities Act of 1933.
Use of proceeds — Tender offer, redemption and
partial repurchase.
On April 22, 2010, the
Company commenced a cash tender offer for the outstanding
principal amount of its Euro Notes due 2013 and its Senior Notes
due 2015. The tender offer expired May 19, 2010, and the
Company redeemed all remaining notes that were not tendered in
the offer on May 25, 2010. The Company purchased all of the
outstanding Euro Notes due 2013 and its Senior Notes due 2015
pursuant to the tender offer and subsequent redemption.
On May 21, 2010, the Company also repurchased
¥10,883,500,000 in principal amount tendered of the
Yen-denominated Eurobonds due 2016 for total consideration of
$100.0 million including accrued interest.
The tender offer, redemption and partial repurchase described
above, as well as underwriting fees associated with the new
issuance, were funded with the proceeds from the issuance of the
2018 Euro Notes and the 2020 Senior Notes.
Short-term
Borrowings
Short-term borrowings consist of term loans and revolving credit
facilities which the Company expects to either pay over the next
twelve months or refinance at the end of their applicable terms.
Loss on
Early Extinguishment of Debt
For the year ended November 28, 2010, the Company recorded
a loss of $16.6 million on early extinguishment of debt,
comprised of tender premiums of $30.2 million and the
write-off of $7.6 million of unamortized debt issuance
costs, net of applicable premium, offset by a gain of
$21.2 million related to the partial repurchase of
Yen-denominated Eurobonds at a discount to their par value.
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Principal
Payments on Short-term and Long-term Debt
The table below sets forth, as of November 28, 2010, the
Company’s required aggregate short-term and long-term debt
principal payments (inclusive of premium and discount) for the
next five fiscal years and thereafter.
| (Dollars in thousands) | ||||
|
2011
|
$ | 46,418 | ||
|
2012
|
108,250 | |||
|
2013
|
— | |||
|
2014
|
323,676 | |||
|
2015
|
— | |||
|
Thereafter
|
1,384,802 | |||
|
Total future debt principal payments
|
$ | 1,863,146 | ||
Short-term
Credit Lines and Standby Letters of Credit
The Company’s unused lines of credit under its senior
secured revolving credit facility totaled $369.0 million at
November 28, 2010, as the Company’s total availability
of $445.5 million, based on the collateral levels discussed
above, was reduced by $76.5 million of letters of credit
and other credit usage allocated under the facility, yielding a
net availability of $369.0 million. Included in the
$76.5 million of letters of credit on November 28,
2010, were $14.0 million of other credit usage and
$62.5 million of stand-by letters of credit with various
international banks which serve as guarantees to cover
U.S. workers’ compensation claims and the working
capital requirements for certain subsidiaries, primarily India.
The Company pays fees on the standby letters of credit, and
borrowings against the letters of credit are subject to interest
at various rates.
Interest
Rates on Borrowings
The Company’s weighted-average interest rate on average
borrowings outstanding during 2010, 2009 and 2008 was 7.05%,
7.44% and 8.09%, respectively. The weighted-average interest
rate on average borrowings outstanding includes the amortization
of capitalized bank fees and underwriting fees, and excludes
interest on obligations to participants under deferred
compensation plans.
Dividends
and Restrictions
The terms of certain of the indentures relating to the
Company’s unsecured notes and its senior secured revolving
credit facility agreement contain covenants that restrict the
Company’s ability to pay dividends to its stockholders. The
Company paid cash dividends of $20 million both in 2010 and
in 2009, and $50 million in 2008. For further information,
see Note 14. As of November 28, 2010, and at the time
the dividends were paid, the Company met the requirements of its
debt instruments. Subsidiaries of the Company that are not
wholly-owned subsidiaries are permitted under the indentures to
pay dividends to all stockholders either on a pro rata basis or
on a basis that results in the receipt by the Company of
dividends or distributions of greater value than it would
receive on a pro rata basis. There are no restrictions under the
Company’s senior secured revolving credit facility or its
indentures on the transfer of the assets of the Company’s
subsidiaries to the Company in the form of loans, advances or
cash dividends without the consent of a third party.
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
| NOTE 7: | GUARANTEES |
Guarantees.
See Note 6 regarding
guarantees of the Company’s senior secured revolving credit
facility.
Indemnification agreements.
In the ordinary
course of business, the Company enters into agreements
containing indemnification provisions under which the Company
agrees to indemnify the other party for specified claims and
losses. For example, the Company’s trademark license
agreements, real estate leases, consulting agreements, logistics
outsourcing agreements, securities purchase agreements and
credit agreements typically contain such provisions. This type
of indemnification provision obligates the Company to pay
certain amounts associated with claims brought against the other
party as the result of trademark infringement, negligence or
willful misconduct of Company employees, breach of contract by
the Company including inaccuracy of representations and
warranties, specified lawsuits in which the Company and the
other party are co-defendants, product claims and other matters.
These amounts generally are not readily quantifiable; the
maximum possible liability or amount of potential payments that
could arise out of an indemnification claim depends entirely on
the specific facts and circumstances associated with the claim.
The Company has insurance coverage that minimizes the potential
exposure to certain of such claims. The Company also believes
that the likelihood of substantial payment obligations under
these agreements to third parties is low.
Covenants.
The Company’s long-term debt
agreements contain customary covenants restricting its
activities as well as those of its subsidiaries, including
limitations on its, and its subsidiaries’, ability to sell
assets; engage in mergers; enter into capital leases or certain
leases not in the ordinary course of business; enter into
transactions involving related parties or derivatives; incur or
prepay indebtedness or grant liens or negative pledges on its
assets; make loans or other investments; pay dividends or
repurchase stock or other securities; guaranty third-party
obligations; make capital expenditures; and make changes in its
corporate structure. For additional information see Note 6.
| NOTE 8: | EMPLOYEE BENEFIT PLANS |
Pension plans.
The Company has several
non-contributory defined benefit retirement plans covering
eligible employees. Plan assets are invested in a diversified
portfolio of securities including stocks, bonds, real estate
investment funds, cash equivalents, and alternative investments.
Benefits payable under the plans are based on years of service,
final average compensation, or both. The Company retains the
right to amend, curtail or discontinue any aspect of the plans,
subject to local regulations.
Postretirement plans.
The Company maintains
plans that provide postretirement benefits to eligible
employees, principally health care, to substantially all
U.S. retirees and their qualified dependents. These plans
were established with the intention that they would continue
indefinitely. However, the Company retains the right to amend,
curtail or discontinue any aspect of the plans at any time. The
plans are contributory and contain certain cost-sharing
features, such as deductibles and coinsurance. The
Company’s policy is to fund postretirement benefits as
claims and premiums are paid.
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
The following tables summarize activity of the Company’s
defined benefit pension plans and postretirement benefit plans:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Change in benefit obligation:
|
||||||||||||||||
|
Benefit obligation at beginning of year
|
$ | 1,061,265 | $ | 840,683 | $ | 176,765 | $ | 151,097 | ||||||||
|
Service cost
|
7,794 | 5,254 | 474 | 428 | ||||||||||||
|
Interest cost
|
59,680 | 61,698 | 8,674 | 11,042 | ||||||||||||
|
Plan participants’ contribution
|
1,212 | 1,294 | 6,115 | 6,431 | ||||||||||||
|
Plan amendments
|
3,138 | — | — | — | ||||||||||||
|
Actuarial loss
(gain)
(1)
|
67,276 | 195,390 | (2,005 | ) | 30,569 | |||||||||||
|
Net curtailment loss (gain)
|
93 | (852 | ) | — | 2,996 | |||||||||||
|
Impact of foreign currency changes
|
(7,004 | ) | 16,946 | — | — | |||||||||||
|
Plan settlements
|
(3,115 | ) | (5,787 | ) | — | — | ||||||||||
|
Special termination benefits
|
312 | 78 | — | — | ||||||||||||
|
Benefits paid
|
(58,886 | ) | (53,439 | ) | (25,715 | ) | (25,798 | ) | ||||||||
|
Benefit obligation at end of year
|
$ | 1,131,765 | $ | 1,061,265 | $ | 164,308 | $ | 176,765 | ||||||||
|
Change in plan assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 681,008 | $ | 601,612 | $ | — | $ | — | ||||||||
|
Actual return on plan assets
|
76,546 | 108,388 | — | — | ||||||||||||
|
Employer contribution
|
37,945 | 18,051 | 19,600 | 19,367 | ||||||||||||
|
Plan participants’ contributions
|
1,212 | 1,294 | 6,115 | 6,431 | ||||||||||||
|
Plan settlements
|
(3,115 | ) | (5,787 | ) | — | — | ||||||||||
|
Impact of foreign currency changes
|
(3,034 | ) | 10,889 | — | — | |||||||||||
|
Benefits paid
|
(58,886 | ) | (53,439 | ) | (25,715 | ) | (25,798 | ) | ||||||||
|
Fair value of plan assets at end of year
|
731,676 | 681,008 | — | — | ||||||||||||
|
Unfunded status at end of year
|
$ | (400,089 | ) | $ | (380,257 | ) | $ | (164,308 | ) | $ | (176,765 | ) | ||||
| (1) | Actuarial (gains) and losses in the Company’s pension benefit and postretirement benefit plans were driven by changes in discount rate assumptions, primarily for the Company’s U.S. plans. Changes in financial markets during 2009, including a decrease in corporate bond yield indices, drove a reduction in the discount rates used to measure the benefit obligations. While discount rates continued to decline in 2010, the change was much lower than the previous year, driving lower actuarial losses year over year for the pension plans and an actuarial gain for postretirement. |
71
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Amounts recognized in the consolidated balance sheets as of
November 28, 2010, and November 29, 2009, consist of
the following:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Prepaid benefit cost
|
$ | 264 | $ | 2,107 | $ | — | $ | — | ||||||||
|
Accrued benefit liability — current portion
|
(7,903 | ) | (7,698 | ) | (17,243 | ) | (19,931 | ) | ||||||||
|
Accrued benefit liability — long-term portion
|
(392,450 | ) | (374,666 | ) | (147,065 | ) | (156,834 | ) | ||||||||
| $ | (400,089 | ) | $ | (380,257 | ) | $ | (164,308 | ) | $ | (176,765 | ) | |||||
|
Accumulated other comprehensive income (loss):
|
||||||||||||||||
|
Net actuarial loss
|
$ | (326,417 | ) | $ | (316,561 | ) | $ | (49,094 | ) | $ | (56,707 | ) | ||||
|
Net prior service (cost) benefit
|
(2,096 | ) | 710 | 45,794 | 75,360 | |||||||||||
| $ | (328,513 | ) | $ | (315,851 | ) | $ | (3,300 | ) | $ | 18,653 | ||||||
The accumulated benefit obligation for all defined benefit plans
was $1.1 billion and $1.0 billion at November 28,
2010, and November 29, 2009, respectively. Information for
the Company’s defined benefit plans with an accumulated or
projected benefit obligation in excess of plan assets is as
follows:
| Pension Benefits | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Accumulated benefit obligations in excess of plan assets:
|
||||||||
|
Aggregate accumulated benefit obligation
|
$ | 1,045,871 | $ | 983,057 | ||||
|
Aggregate fair value of plan assets
|
665,029 | 621,826 | ||||||
|
Projected benefit obligations in excess of plan assets:
|
||||||||
|
Aggregate projected benefit obligation
|
$ | 1,124,777 | $ | 1,036,245 | ||||
|
Aggregate fair value of plan assets
|
724,425 | 653,881 | ||||||
72
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
The components of the Company’s net periodic benefit cost
(income) were as follows:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Net periodic benefit cost (income):
|
||||||||||||||||||||||||
|
Service cost
|
$ | 7,794 | $ | 5,254 | $ | 6,370 | $ | 474 | $ | 428 | $ | 590 | ||||||||||||
|
Interest cost
|
59,680 | 61,698 | 61,581 | 8,674 | 11,042 | 10,785 | ||||||||||||||||||
|
Expected return on plan assets
|
(46,085 | ) | (42,191 | ) | (62,847 | ) | — | — | — | |||||||||||||||
|
Amortization of prior service cost
benefit)
(1)
|
453 | 792 | 857 | (29,566 | ) | (39,698 | ) | (41,405 | ) | |||||||||||||||
|
Amortization of transition asset
|
— | — | 231 | — | — | — | ||||||||||||||||||
|
Amortization of actuarial loss
|
26,660 | 17,082 | 577 | 5,608 | 1,734 | 3,960 | ||||||||||||||||||
|
Curtailment loss
(gain)
(2)
|
106 | 1,176 | 782 | — | 467 | (5,944 | ) | |||||||||||||||||
|
Special termination benefit
|
312 | 78 | 36 | — | — | — | ||||||||||||||||||
|
Net settlement loss (gain)
|
425 | 1,655 | (65 | ) | — | — | — | |||||||||||||||||
|
Net periodic benefit cost (income)
|
49,345 | 45,544 | 7,522 | (14,810 | ) | (26,027 | ) | (32,014 | ) | |||||||||||||||
|
Changes in accumulated other comprehensive loss:
|
||||||||||||||||||||||||
|
Actuarial loss
(gain)
(3)
|
40,223 | 127,374 | (2,005 | ) | 30,569 | |||||||||||||||||||
|
Amortization of prior service (cost) benefit
|
(453 | ) | (792 | ) | 29,566 | 39,698 | ||||||||||||||||||
|
Amortization of actuarial loss
|
(26,660 | ) | (17,082 | ) | (5,608 | ) | (1,734 | ) | ||||||||||||||||
|
Curtailment (loss) gain
|
(13 | ) | (1,625 | ) | — | 2,529 | ||||||||||||||||||
|
Net settlement loss
|
(425 | ) | (360 | ) | — | — | ||||||||||||||||||
|
Total recognized in accumulated other comprehensive loss
|
12,672 | 107,515 | 21,953 | 71,062 | ||||||||||||||||||||
|
Total recognized in net periodic benefit cost (income)and
accumulated other comprehensive loss
|
$ | 62,017 | $ | 153,059 | $ | 7,143 | $ | 45,035 | ||||||||||||||||
| (1) | Postretirement benefits amortization of prior service benefit recognized during each of years 2010, 2009 and 2008, relates primarily to the favorable impact of the February 2004 and August 2003 plan amendments. | |
| (2) | Curtailment loss (gain) primarily relates to 2007 revisions to the labor agreement with many distribution-related employees in North America. | |
| (3) | Reflects the impact of the changes in the discount rate assumptions at year-end remeasurement for the pension and postretirement benefit plans for 2010 and 2009. |
The estimated net loss and net prior service benefit for the
Company’s defined benefit pension and postretirement
benefit plans, respectively, that will be amortized from
“Accumulated other comprehensive loss” into net
periodic benefit cost (income) in 2011 are expected to be a cost
of $27.2 million and a benefit of $23.9 million,
respectively.
73
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Assumptions used in accounting for the Company’s benefit
plans were as follows:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Weighted-average assumptions used to determine net periodic
benefit cost:
|
||||||||||||||||
|
Discount rate
|
5.8 | % | 7.5 | % | 5.2 | % | 7.9 | % | ||||||||
|
Expected long-term rate of return on plan assets
|
6.9 | % | 7.2 | % | ||||||||||||
|
Rate of compensation increase
|
4.0 | % | 4.0 | % | ||||||||||||
|
Weighted-average assumptions used to determine benefit
obligations:
|
||||||||||||||||
|
Discount rate
|
5.4 | % | 5.8 | % | 4.9 | % | 5.2 | % | ||||||||
|
Rate of compensation increase
|
3.9 | % | 4.0 | % | ||||||||||||
|
Assumed health care cost trend rates were as follows:
|
||||||||||||||||
|
Health care trend rate assumed for next year
|
7.8 | % | 8.0 | % | ||||||||||||
|
Rate trend to which the cost trend is assumed to decline
|
4.5 | % | 4.5 | % | ||||||||||||
|
Year that rate reaches the ultimate trend rate
|
2028 | 2028 | ||||||||||||||
For the Company’s U.S. benefit plans, the discount
rate used in 2010 and 2009 to determine the present value of the
future pension and postretirement plan obligations was based on
a yield curve constructed from a portfolio of high quality
corporate bonds with various maturities. Each year’s
expected future benefit payments are discounted to their present
value at the appropriate yield curve rate, thereby generating
the overall discount rate. In 2010 and 2009, the Company
utilized a variety of country-specific third-party bond indices
to determine the appropriate discount rates to use for the
benefit plans of its foreign subsidiaries.
The Company bases the overall expected long-term rate of return
on assets on anticipated long-term returns of individual asset
classes and each pension plans’ target asset allocation
strategy based on current economic conditions. For the
U.S. pension plans, the expected long-term returns for each
asset class are determined through a mean-variance model to
estimate 20 year returns for the plan.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the Company’s postretirement
benefits plans. A one percentage-point change in assumed health
care cost trend rates would have no significant effect on the
total service and interest cost components or on the
postretirement benefit obligation.
Consolidated pension plan assets relate primarily to the
U.S. pension plans. The Company utilizes the services of
independent third-party investment managers to oversee the
management of U.S. pension plan assets. The Company’s
investment strategy is to invest plan assets in a diversified
portfolio of domestic and international equity securities, fixed
income securities and real estate and other alternative
investments with the objective of generating long-term growth in
plan assets at a reasonable level of risk. Prohibited
investments for the U.S. pension plan include certain
privately placed or other non-marketable debt instruments,
letter stock, commodities or commodity contracts and derivatives
of mortgage-backed securities, such as interest-only,
principal-only or inverse floaters. The current target
allocation percentages for the Company’s U.S. pension
plan assets are
43-47%
for
equity securities,
43-47%
for
fixed income securities and 8-12% for other alternative
investments, including real estate.
74
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
The fair value of the Company’s pension plan assets by
asset class are as follows:
| Year Ended November 28, 2010 | ||||||||||||||||
|
Quoted Prices in
|
Significant
|
Significant
|
||||||||||||||
|
Active Markets for
|
Observable
|
Unobservable
|
||||||||||||||
|
Identical Assets
|
Inputs
|
Inputs
|
||||||||||||||
|
Asset Class
|
Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Cash and cash equivalents
|
$ | 3,838 | $ | 3,838 | $ | — | $ | — | ||||||||
|
Equity
securities
(1)
|
||||||||||||||||
|
U.S. large cap
|
162,222 | — | 162,222 | — | ||||||||||||
|
U.S. small cap
|
34,864 | — | 34,864 | — | ||||||||||||
|
International
|
149,637 | — | 149,637 | — | ||||||||||||
|
Fixed income
securities
(2)
|
311,453 | — | 311,453 | — | ||||||||||||
|
Other alternative investments
|
||||||||||||||||
|
Real
estate
(3)
|
50,857 | — | 49,206 | 1,651 | ||||||||||||
|
Private
equity
(4)
|
4,256 | — | — | 4,256 | ||||||||||||
|
Hedge
fund
(5)
|
3,184 | — | 2,736 | 448 | ||||||||||||
|
Other
(6)
|
11,365 | — | 11,365 | — | ||||||||||||
|
Total investments at fair value
|
$ | 731,676 | $ | 3,838 | $ | 721,483 | $ | 6,355 | ||||||||
| (1) | Primarily comprised of equity index funds that track various market indices. | |
| (2) | Predominantly includes bond index funds that invest in U.S. government and investment grade corporate bonds. | |
| (3) | Primarily comprised of investments in U.S. Real Estate Investment Trusts. | |
| (4) | Represents holdings in a diversified portfolio of private equity funds and direct investments in companies located primarily in North America. Fair values are determined by investment fund managers using primarily unobservable market data. | |
| (5) | Primarily comprised of an investment in a foreign currency hedge fund where the objective is to deliver a return that represents the return of the S&P 500 equity index plus the gains or losses arising from hedging a range of international currencies from a fixed-weight overseas equity benchmark into Sterling. Amount classified as Level 2 includes a portfolio of forward exchange contracts, S&P futures contracts and other liquid assets, whose fair values are primarily based on observable market data. | |
| (6) | Primarily relates to accounts held and managed by a third-party insurance company for employee-participants in Belgium. Fair values are based on accumulated plan contributions plus a contractually-guaranteed return plus a share of any incremental investment fund profits. |
The fair value of plan assets are composed of U.S. plan
assets of approximately $611 million and
non-U.S. plan
assets of approximately $121 million. The fair values of
the substantial majority of the equity, fixed income and real
estate investments are based on the net asset value of comingled
trust funds that passively track various market indices.
75
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
The Company’s estimated future benefit payments to
participants, which reflect expected future service, as
appropriate, are anticipated to be paid as follows:
|
Pension
|
Postretirement
|
|||||||||||
|
Fiscal year
|
Benefits | Benefits | Total | |||||||||
| (Dollars in thousands) | ||||||||||||
|
2011
|
$ | 56,098 | $ | 19,789 | $ | 75,887 | ||||||
|
2012
|
58,247 | 19,362 | 77,609 | |||||||||
|
2013
|
58,835 | 18,872 | 77,707 | |||||||||
|
2014
|
58,989 | 18,343 | 77,332 | |||||||||
|
2015
|
60,898 | 17,869 | 78,767 | |||||||||
|
2016-2020
|
338,120 | 80,843 | 418,963 | |||||||||
At November 28, 2010, the Company’s contributions to
its pension plans in 2011 were estimated to be approximately
$134.6 million.
| NOTE 9: | EMPLOYEE INVESTMENT PLANS |
The Company maintained two significant employee investment plans
as of November 28, 2010. The Employee Savings and
Investment Plan of Levi Strauss & Co.
(“ESIP”) and the Levi Strauss & Co. Employee
Long-Term Investment and Savings Plan (“ELTIS”) are
two qualified plans that cover eligible home office employees
and U.S. field employees, respectively.
The Company matches 100% of ESIP participant’s
contributions to all funds maintained under the qualified plan
up to the first 7.5% of eligible compensation. Under ELTIS, the
Company may match 50% of participants’ contributions to all
funds maintained under the qualified plan up to the first 10% of
eligible compensation. Employees are immediately 100% vested in
the Company match. The Company matched eligible employee
contributions in ELTIS at 50% for the fiscal years ended
November 28, 2010, November 29, 2009, and
November 30, 2008. The ESIP includes a profit sharing
feature that provides Company contributions of
1.0%-2.5%
of
home office employee eligible pay if the Company meets its
earnings target or exceeds it by 10%. The ELTIS also includes a
profit sharing provision with payments made at the sole
discretion of the board of directors.
Total amounts charged to expense for the years ended
November 28, 2010, November 29, 2009, and
November 30, 2008, were $9.7 million,
$10.0 million and $11.0 million, respectively.
| NOTE 10: | EMPLOYEE INCENTIVE COMPENSATION PLANS |
Annual
Incentive Plan
The Annual Incentive Plan (“AIP”) provides a cash
bonus that is earned based upon business unit and consolidated
financial results as measured against pre-established internal
targets and upon the performance and job level of the
individual. The majority of the Company’s employees are
eligible for this plan. Total amounts charged to expense for the
years ended November 28, 2010, November 29, 2009, and
November 30, 2008, were $46.1 million,
$51.9 million and $41.1 million, respectively. As of
November 28, 2010, and November 29, 2009, the Company
had accrued $49.8 million and $55.4 million,
respectively, for the AIP.
Long-Term
Incentive Plans
2006 Equity incentive plan.
In July 2006, the
Company’s board of directors (the “Board”)
adopted, and the stockholders approved, the 2006 Equity
Incentive Plan (“EIP”). For more information on this
plan, see Note 11.
76
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
2005 Long-term incentive plan
(“LTIP”).
The Company established a
long-term cash incentive plan effective at the beginning of
2005. Executive officers are not participants in this plan. The
plan is intended to reward management for its long-term impact
on total Company earnings performance. Performance will be
measured at the end of a three-year period based on the
Company’s performance over the period measured against the
following pre-established targets: (i) the Company’s
target earnings before interest, taxes, depreciation and
amortization (“EBITDA”), excluding business
restructuring charges, for the three-year period; and
(ii) the target compound annual growth rate in the
Company’s earnings before interest, taxes, depreciation and
amortization over the three-year period. Individual target
amounts are set for each participant based on job level. Awards
will be paid out in the quarter following the end of the
three-year period based on Company performance against
objectives. In 2008, 2009 and 2010, additional grants of LTIP
awards were made based on two target measures: net revenue
compound annual growth rate and EBIT compound annual growth
rate, excluding business restructuring charges, over a
three-year period.
The Company recorded expense for the LTIP of $10.6 million,
$10.2 million and $4.1 million for the years ended
November 28, 2010, November 29, 2009, and
November 30, 2008, respectively. As of November 28,
2010, and November 29, 2009, the Company had accrued a
total of $26.5 million and $15.9 million,
respectively, for the LTIP, of which $9.1 million was
recorded in “Accrued salaries, wages and employee
benefits” as of November 28, 2010, and
$17.4 million and $15.9 million were recorded in
“Long-term employee related benefits” as
November 28, 2010, and November 29, 2009,
respectively, on the Company’s consolidated balance sheets.
| NOTE 11: | STOCK-BASED INCENTIVE COMPENSATION PLANS |
The Company recognized stock-based compensation expense of
$11.7 million, $9.1 million and $7.3 million, and
related income tax benefits of $4.5 million,
$3.3 million and $2.8 million, respectively, for the
years ended November 28, 2010, November 29, 2009, and
November 30, 2008. As of November 28, 2010, there was
$15.2 million of total unrecognized compensation cost
related to nonvested awards, which cost is expected to be
recognized on a straight-line basis over a weighted-average
period of 2.1 years. No stock-based compensation cost has
been capitalized in the accompanying consolidated financial
statements.
2006
Equity Incentive Plan
Under the Company’s 2006 Equity Incentive Plan
(“EIP”), a variety of stock awards, including stock
options, restricted stock, restricted stock units
(“RSUs”), and stock appreciation rights
(“SARs”) may be granted. The EIP also provides for the
grant of performance awards in the form of cash or equity. The
aggregate number of shares of common stock authorized for
issuance under the EIP is 700,000 shares. At
November 28, 2010, 655,880 shares remained available
for issuance.
Under the EIP, stock awards have a maximum contractual term of
ten years and generally must have an exercise price at least
equal to the fair market value of the Company’s common
stock on the date the award is granted. The Company’s
common stock is not listed on any stock exchange. Accordingly,
as provided by the EIP, the stock’s fair market value is
determined by the Board based upon a valuation performed by
Evercore. Awards vest according to terms determined at the time
of grant. Unvested stock awards are subject to forfeiture upon
termination of employment prior to vesting, but are subject in
some cases to early vesting upon specified events, including
certain corporate transactions as defined in the EIP or as
otherwise determined by the Board in its discretion. Some stock
awards are payable in either shares of the Company’s common
stock or cash at the discretion of the Board as determined at
the time of grant.
Upon the exercise of a SAR, the participant will receive a share
of common stock in an amount equal to the product of
(i) the excess of the per share fair market value of the
Company’s common stock on the date of exercise over the
exercise price, multiplied by (ii) the number of shares of
common stock with respect to which the SAR is exercised.
77
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Each recipient’s initial grant of RSUs is converted to a
share of common stock six months after discontinuation of
service with the Company for each fully vested RSU held at that
date. Subsequent grants of RSUs provide recipients with the
opportunity to make deferral elections regarding when the
Company’s common stock are to be delivered in settlement of
vested RSUs. If the recipient does not elect to defer the
receipt of common stock, then the RSUs are immediately converted
to common stock upon vesting. The RSUs additionally have
“dividend equivalent rights,” of which dividends paid
by the Company on its common stock are credited by the
equivalent addition of RSUs.
Shares of common stock will be issued from the Company’s
authorized but unissued shares. However, all outstanding shares
of the Company’s common stock are currently deposited in a
voting trust, and consequently, equity holders legally hold
“voting trust certificates,” not stock. Therefore,
during the effective term of the voting trust, voting trust
certificates are issued in lieu of shares of common stock.
Put rights.
Prior to an initial public
offering (“IPO”) of the Company’s common stock, a
participant (or estate or other beneficiary of a deceased
participant) may require the Company to repurchase shares of the
common stock held by the participant at then-current fair market
value (a “put right”). Put rights may be exercised
only with respect to shares of the Company’s common stock
that have been held by a participant for at least six months
following their issuance date, thus exposing the holder to the
risk and rewards of ownership for a reasonable period of time.
Accordingly, the SARs and RSUs are classified as equity awards,
and are reported in “Stockholders’ deficit” in
the accompanying consolidated balance sheets.
Call rights.
Prior to an IPO, the Company also
has the right to repurchase shares of its common stock held by a
participant (or estate or other beneficiary of a deceased
participant, or other permitted transferee) at then-current fair
market value (a “call right”). Call rights apply to an
award as well as any shares of common stock acquired pursuant to
the award. If the award or common stock is transferred to
another person, that person is subject to the call right. As
with the put rights, call rights may be exercised only with
respect to shares of common stock that have been held by a
participant for at least six months following their issuance
date.
Temporary equity.
Equity-classified awards
that may be settled in cash at the option of the holder are
presented on the balance sheet outside permanent equity.
Accordingly, “Temporary equity” on the face of the
accompanying consolidated balance sheets includes the portion of
the intrinsic value of these awards relating to the elapsed
service period since the grant date as well as the fair value of
common stock issued pursuant to the EIP.
78
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
SARs.
The Company grants SARs to a small group
of the Company’s senior executives. SAR activity during the
years ended November 28, 2010, and November 29, 2009,
was as follows:
|
Weighted-Average
|
||||||||||||
|
Weighted-Average
|
Remaining
|
|||||||||||
| Units | Exercise Price | Contractual Life (Yrs) | ||||||||||
|
Outstanding at November 30, 2008
|
1,414,709 | $ | 48.20 | 4.8 | ||||||||
|
Granted
|
471,455 | 24.90 | ||||||||||
|
Exercised
|
— | — | ||||||||||
|
Forfeited
|
(173,608 | ) | 48.73 | |||||||||
|
Expired
|
— | — | ||||||||||
|
Outstanding at November 29, 2009
|
1,712,556 | $ | 41.73 | 4.7 | ||||||||
|
Granted
|
589,092 | 36.50 | ||||||||||
|
Exercised
|
(6,889 | ) | 24.75 | |||||||||
|
Forfeited
|
(133,914 | ) | 36.89 | |||||||||
|
Expired
|
(245,825 | ) | 43.35 | |||||||||
|
Outstanding at November 28, 2010
|
1,915,020 | $ | 40.32 | 4.5 | ||||||||
|
Vested and expected to vest at November 28, 2010
|
1,847,324 | $ | 40.52 | 4.5 | ||||||||
|
Exercisable at November 28, 2010
|
1,117,832 | $ | 44.41 | 3.5 | ||||||||
The vesting terms of SARs range from
two-and-a-half
to four years, and have maximum contractual lives ranging from
six-and-a-half
to ten years.
The weighted-average grant date fair value of SARs were
estimated using a Black-Scholes option valuation model. The
weighted-average grant date fair values and corresponding
weighted-average assumptions used in the model were as follows:
| SARs Granted | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Weighted-average grant date fair value
|
$ | 13.10 | $ | 11.98 | $ | 18.26 | ||||||
|
Weighted-average assumptions:
|
||||||||||||
|
Expected life (in years)
|
4.5 | 4.5 | 4.5 | |||||||||
|
Expected volatility
|
48.0 | % | 59.2 | % | 39.0 | % | ||||||
|
Risk-free interest rate
|
2.1 | % | 1.9 | % | 2.7 | % | ||||||
|
Expected dividend
|
2.0 | % | 0.4 | % | — | |||||||
79
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
RSUs.
The Company grants RSUs to certain
members of its Board of Directors. RSU activity during the years
ended November 28, 2010, and November 29, 2009, was as
follows:
|
Weighted-Average
|
||||||||
| Units | Fair Value | |||||||
|
Outstanding at November 30, 2008
|
33,692 | $ | 50.73 | |||||
|
Granted
|
48,651 | 25.42 | ||||||
|
Converted
|
(6,503 | ) | 49.06 | |||||
|
Forfeited
|
— | — | ||||||
|
Outstanding at November 29, 2009
|
75,840 | $ | 34.63 | |||||
|
Granted
|
28,032 | 35.34 | ||||||
|
Converted
|
(37,617 | ) | 31.65 | |||||
|
Forfeited
|
— | — | ||||||
|
Outstanding, vested and expected to vest at November 28,
2010
|
66,255 | $ | 36.63 | |||||
The weighted-average grant date fair value of RSUs were
estimated using the Evercore stock valuation.
RSUs vest in a series of three equal installments at thirteen
months, twenty-four months and thirty-six months following the
date of grant. However, if the recipient’s continuous
service terminates for reason other than cause after the first
vesting installment, but prior to full vesting, then the
remaining unvested portion of the award becomes fully vested as
of the date of such termination.
Total
Shareholder Return Plan
In 2008, the Company established the Total Shareholder Return
Plan (“TSRP”) as a cash-settled plan under the EIP to
provide long-term incentive compensation for the Company’s
senior management. The TSRP provides for grants of units that
vest over a three-year performance period. Upon vesting of a
TSRP unit, the participant will receive a cash payout in an
amount equal to the excess of the per share value of the
Company’s common stock at the end of the three-year
performance period over the per share value at the date of
grant. The common stock values used in the determination of the
TSRP grants and payouts are approved by the Board based on the
Evercore stock valuation. Unvested units are subject to
forfeiture upon termination of employment, but are subject in
some cases to early vesting upon specified events, as defined in
the agreement. The TSRP units are classified as liability
instruments due to their cash settlement feature and are
required to be remeasured to fair value at the end of each
reporting period until settlement.
80
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
TSRP activity during the years ended November 28, 2010, and
November 29, 2009, was as follows:
|
Weighted-Average
|
||||||||||||
|
Weighted-Average
|
Fair Value
|
|||||||||||
| Units | Exercise Price | At Period End | ||||||||||
|
Outstanding at November 30, 2008
|
367,050 | $ | 49.76 | $ | 7.27 | |||||||
|
Granted
|
694,425 | 24.83 | ||||||||||
|
Exercised
|
— | — | ||||||||||
|
Forfeited
|
(153,400 | ) | 38.94 | |||||||||
|
Outstanding at November 29, 2009
|
908,075 | $ | 32.52 | $ | 8.56 | |||||||
|
Granted
|
473,275 | 36.40 | ||||||||||
|
Exercised
|
— | — | ||||||||||
|
Forfeited
|
(139,925 | ) | 33.39 | |||||||||
|
Outstanding at November 28, 2010
|
1,241,425 | $ | 33.91 | $ | 13.20 | |||||||
|
Vested and expected to vest at November 28, 2010
|
1,068,295 | $ | 34.26 | $ | 12.76 | |||||||
|
Exercisable at November 28, 2010
|
248,850 | $ | 49.80 | $ | 0.26 | |||||||
The weighted-average fair value of TSRPs at November 28,
2010, and November 29, 2009, was estimated using a
Black-Scholes option valuation model. The weighted-average
assumptions used in the model were as follows
| TSRPs Outstanding at | ||||||||
|
November 28,
|
November 29,
|
|||||||
| 2010 | 2009 | |||||||
|
Weighted-average assumptions:
|
||||||||
|
Expected life (in years)
|
1.2 | 1.8 | ||||||
|
Expected volatility
|
46.2 | % | 63.5 | % | ||||
|
Risk-free interest rate
|
0.3 | % | 0.6 | % | ||||
|
Expected dividend
|
2.0 | % | 2.0 | % | ||||
| NOTE 12: | LONG-TERM EMPLOYEE RELATED BENEFITS |
The liability for long-term employee related benefits was
comprised of the following:
|
November 28,
|
November 29,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Workers’ compensation
|
$ | 18,073 | $ | 21,185 | ||||
|
Deferred compensation
|
60,418 | 58,706 | ||||||
|
Non-current portion of liabilities for long-term and stock-based
incentive plans
|
24,273 | 17,617 | ||||||
|
Total
|
$ | 102,764 | $ | 97,508 | ||||
81
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Workers’
Compensation
The Company maintains a workers’ compensation program in
the United States that provides for statutory benefits arising
from work-related employee injuries. For the years ended
November 28, 2010, November 29, 2009, and
November 30, 2008, the Company reduced its self-insurance
liabilities for workers’ compensation claims by
$0.6 million, $8.4 million and $4.3 million,
respectively. The reductions were primarily driven by continuing
changes in the Company’s estimated future claims payments
as a result of more favorable than projected actual claims
development during the year. As of November 28, 2010, and
November 29, 2009, the current portions of workers’
compensation liabilities were $2.7 million and
$2.0 million, respectively, and were included in
“Accrued salaries, wages and employee benefits” on the
Company’s consolidated balance sheets.
Deferred
Compensation
Deferred compensation plan for executives and outside
directors, established January 1, 2003.
The
Company has a non-qualified deferred compensation plan for
executives and outside directors that was established on
January 1, 2003. The deferred compensation plan obligations
are payable in cash upon retirement, termination of employment
and/or
certain other times in a lump-sum distribution or in
installments, as elected by the participant in accordance with
the plan. As of November 28, 2010, and November 29,
2009, these plan liabilities totaled $18.8 million and
$16.8 million, respectively, of which $1.1 million and
$1.6 million was included in “Accrued salaries, wages
and employee benefits” as of November 28, 2010, and
November 29, 2009, respectively. The Company held funds of
approximately $18.3 million and $16.9 million in an
irrevocable grantor’s rabbi trust as of November 28,
2010, and November 29, 2009, respectively, related to this
plan.
Deferred compensation plan for executives, prior to
January 1, 2003.
The Company also maintains
a non-qualified deferred compensation plan for certain
management employees relating to compensation deferrals for the
period prior to January 1, 2003. The rabbi trust is not a
feature of this plan. As of November 28, 2010, and
November 29, 2009, liabilities for this plan totaled
$48.9 million and $53.5 million, respectively, of
which $6.2 million and $10.0 million, respectively,
was included in “Accrued salaries, wages and employee
benefits” on the Company’s consolidated balance sheets.
Interest earned by the participants in deferred compensation
plans was $5.6 million, $10.1 million and
$5.0 million for the years ended November 28, 2010,
November 29, 2009, and November 30, 2008,
respectively. The charges were included in “Interest
expense” in the Company’s consolidated statements of
income.
82
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
| NOTE 13: | COMMITMENTS AND CONTINGENCIES |
Operating
Lease Commitments
The Company is obligated under operating leases for
manufacturing, finishing and distribution facilities, office
space, retail stores and equipment. At November 28, 2010,
obligations for future minimum payments under operating leases
were as follows:
| (Dollars in thousands) | ||||
|
2011
|
$ | 146,879 | ||
|
2012
|
124,863 | |||
|
2013
|
99,555 | |||
|
2014
|
79,585 | |||
|
2015
|
68,846 | |||
|
Thereafter
|
238,764 | |||
|
Total future minimum lease payments
|
$ | 758,492 | ||
In general, leases relating to real estate include renewal
options of up to approximately 27 years, except for the
San Francisco headquarters office lease, which contains
multiple renewal options of up to 57 years. Some leases
contain escalation clauses relating to increases in operating
costs. Rental expense for the years ended November 28,
2010, November 29, 2009, and November 30, 2008, was
$161.2 million, $151.8 million and
$128.2 million, respectively.
Foreign
Exchange Contracts
The Company uses derivative instruments to manage its exposure
to foreign currencies. The Company is exposed to credit loss in
the event of nonperformance by the counterparties to the forward
foreign exchange contracts. However, the Company believes that
its exposures are appropriately diversified across
counterparties and that these counterparties are creditworthy
financial institutions. Please see Note 5 for additional
information.
Other
Contingencies
Other litigation.
In the ordinary course of
business, the Company has various pending cases involving
contractual matters, employee-related matters, distribution
questions, product liability claims, trademark infringement and
other matters. The Company does not believe there are any of
these pending legal proceedings that will have a material impact
on its financial condition, results of operations or cash flows.
| NOTE 14: | DIVIDEND PAYMENT |
The Company paid cash dividends of $20 million in the
second quarters of 2010 and 2009, and $50 million in the
second quarter of 2008. The payments resulted in a decrease to
“Additional paid-in capital” as the Company was in an
accumulated deficit position when the dividend was paid.
Subsequent to the Company’s year-end, on December 9,
2010, the Company’s Board of Directors declared a cash
dividend of $20 million. The dividend was paid to
stockholders of record at the close of business on
December 20, 2010.
The Company does not have an annual dividend policy. The Company
will continue to review its ability to pay cash dividends at
least annually, and dividends may be declared at the discretion
of the Company’s Board of
83
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Directors depending upon, among other factors, the tax impact to
the dividend recipients, the Company’s financial condition
and compliance with the terms of our debt agreements.
| NOTE 15: | ACCUMULATED OTHER COMPREHENSIVE LOSS |
Accumulated other comprehensive income (loss) is summarized
below:
| Levi Strauss & Co. | ||||||||||||||||||||||||||||||||
| Translation Adjustments |
Unrealized
|
|||||||||||||||||||||||||||||||
|
Pension and
|
Net
|
Foreign
|
Cash
|
Gain (Loss) on
|
||||||||||||||||||||||||||||
|
Postretirement
|
Investment
|
Currency
|
Flow
|
Marketable
|
Noncontrolling
|
|||||||||||||||||||||||||||
| Benefits | Hedges | Translation | Hedges | Securities | Total | Interest | Totals | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
Accumulated other comprehensive income (loss) at
November 25, 2007
|
$ | 65,427 | $ | (35,834 | ) | $ | (21,673 | ) | $ | 23 | $ | 98 | $ | 8,041 | $ | 5,885 | $ | 13,926 | ||||||||||||||
|
Gross
changes
(1)
|
(209,114 | ) | 38,369 | (26,395 | ) | (37 | ) | (6,691 | ) | (203,868 | ) | 2,166 | (201,702 | ) | ||||||||||||||||||
|
Tax
|
75,526 | (14,832 | ) | 4,592 | 14 | 2,612 | 67,912 | — | 67,912 | |||||||||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
(133,588 | ) | 23,537 | (21,803 | ) | (23 | ) | (4,079 | ) | (135,956 | ) | 2,166 | (133,790 | ) | ||||||||||||||||||
|
Accumulated other comprehensive income (loss) at
November 30, 2008
|
(68,161 | ) | (12,297 | ) | (43,476 | ) | — | (3,981 | ) | (127,915 | ) | 8,051 | (119,864 | ) | ||||||||||||||||||
|
Gross
changes
(2)
|
(178,577 | ) | (59,429 | ) | 21,550 | — | 3,178 | (213,278 | ) | 1,894 | (211,384 | ) | ||||||||||||||||||||
|
Tax
|
69,858 | 22,409 | 331 | — | (1,272 | ) | 91,326 | — | 91,326 | |||||||||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
(108,719 | ) | (37,020 | ) | 21,881 | — | 1,906 | (121,952 | ) | 1,894 | (120,058 | ) | ||||||||||||||||||||
|
Accumulated other comprehensive income (loss) at
November 29, 2009
|
(176,880 | ) | (49,317 | ) | (21,595 | ) | — | (2,075 | ) | $ | (249,867 | ) | 9,945 | $ | (239,922 | ) | ||||||||||||||||
|
Gross changes
|
(34,625 | ) | 37,143 | (20,833 | ) | — | 3,615 | (14,700 | ) | 130 | (14,570 | ) | ||||||||||||||||||||
|
Tax
|
12,698 | (14,215 | ) | (4,701 | ) | — | (1,383 | ) | (7,601 | ) | — | (7,601 | ) | |||||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
(21,927 | ) | 22,928 | (25,534 | ) | — | 2,232 | (22,301 | ) | 130 | (22,171 | ) | ||||||||||||||||||||
|
Accumulated other comprehensive income (loss) at
November 28, 2010
|
$ | (198,807 | ) | $ | (26,389 | ) | $ | (47,129 | ) | $ | — | $ | 157 | $ | (272,168 | ) | $ | 10,075 | $ | (262,093 | ) | |||||||||||
| (1) | Pension and postretirement benefit amounts in 2008 primarily resulted from the actuarial loss recorded in conjunction with the 2008 year-end remeasurement of pension benefit obligations, and was primarily driven by reductions in the fair value of the pension plan assets. | |
| (2) | Pension and postretirement benefit amounts in 2009 primarily resulted from the actuarial loss recorded in conjunction with the 2009 year-end remeasurement of pension and postretirement benefit obligations, and was primarily due to a decline in discount rates driven by changes in the financial markets during 2009, including a decrease in corporate bond yield indices. See Note 8 for more information. |
84
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
| NOTE 16: | OTHER INCOME (EXPENSE), NET |
The following table summarizes significant components of
“Other income (expense), net” in the Company’s
consolidated statements of income:
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
|
Foreign exchange management (losses)
gains
(1)
|
$ | (6,179 | ) | $ | (69,554 | ) | $ | 64,443 | ||||
|
Foreign currency transaction gains
(losses)
(2)
|
9,940 | 25,651 | (71,752 | ) | ||||||||
|
Interest income
|
2,232 | 2,537 | 5,167 | |||||||||
|
Other
|
654 | 1,921 | 1,839 | |||||||||
|
Total other income (expense), net
|
$ | 6,647 | $ | (39,445 | ) | $ | (303 | ) | ||||
| (1) | Foreign exchange management losses and gains reflect the impact of foreign currency fluctuation on the Company’s forward foreign exchange contracts. Losses in 2010 were primarily driven by the weakening of the U.S. Dollar against the Australian Dollar and the Swedish Krona relative to the contracted rates. Losses in 2009 were primarily driven by the weakening of the U.S. Dollar against the Euro and the Australian Dollar relative to the contracted rates. | |
| (2) | Foreign currency transaction gains and losses reflect the impact of foreign currency fluctuation on the Company’s foreign currency denominated balances. Gains in 2010 were primarily driven by the appreciation of the British Pound Sterling against the Euro during the year, and the appreciation of the U.S. Dollar against the Japanese Yen in the first half of the year. Gains in 2009 were primarily driven by the appreciation of various foreign currencies against the U.S. Dollar. |
| NOTE 17: | INCOME TAXES |
The Company’s income tax expense was $86.2 million,
$39.2 million and $138.9 million for years 2010, 2009
and 2008, respectively. The 2010 increase in income tax expense
as compared to 2009 was primarily driven by two significant
discrete income tax charges recognized during the second quarter
of 2010, described below, as well as the increase in income
before income taxes. The 2009 decrease in income tax expense as
compared to 2008 was primarily driven by a significant discrete
income tax benefit recognized during the fourth quarter of 2009,
described below, as well as the decrease in income before income
taxes.
The U.S. and foreign components of income before income
taxes were as follows
:
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Domestic
|
$ | 165,489 | $ | 45,992 | $ | 197,976 | ||||||
|
Foreign
|
70,109 | 143,933 | 171,290 | |||||||||
|
Total income before income taxes
|
$ | 235,598 | $ | 189,925 | $ | 369,266 | ||||||
85
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Income tax expense (benefit) consisted of the following:
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
U.S. Federal
|
||||||||||||
|
Current
|
$ | 12,259 | $ | 17,949 | $ | 10,333 | ||||||
|
Deferred
|
24,507 | (11,866 | ) | 77,706 | ||||||||
| 36,766 | 6,083 | 88,039 | ||||||||||
|
U.S. State
|
||||||||||||
|
Current
|
2,854 | 5,361 | 2,322 | |||||||||
|
Deferred
|
2,454 | 5,077 | 6,507 | |||||||||
| 5,308 | 10,438 | 8,829 | ||||||||||
|
Foreign
|
||||||||||||
|
Current
|
39,926 | 21,031 | 50,402 | |||||||||
|
Deferred
|
4,152 | 1,661 | (8,386 | ) | ||||||||
| 44,078 | 22,692 | 42,016 | ||||||||||
|
Consolidated
|
||||||||||||
|
Current
|
55,039 | 44,341 | 63,057 | |||||||||
|
Deferred
|
31,113 | (5,128 | ) | 75,827 | ||||||||
|
Total income tax expense
|
$ | 86,152 | $ | 39,213 | $ | 138,884 | ||||||
The Company’s effective tax rate was 36.6%, 20.6% and 37.6%
for 2010, 2009 and 2008, respectively. The Company’s income
tax expense differed from the amount computed by applying the
U.S. federal statutory income tax rate of 35% to income
before income taxes as follows:
| Year Ended | ||||||||||||||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Income tax expense at U.S. federal statutory rate
|
$ | 82,459 | 35.0 | % | $ | 66,474 | 35.0 | % | $ | 129,243 | 35.0 | % | ||||||||||||
|
State income taxes, net of U.S. federal impact
|
1,894 | 0.8 | % | 6,976 | 3.7 | % | 6,248 | 1.7 | % | |||||||||||||||
|
Change in Medicare legislation
|
14,481 | 6.2 | % | — | — | — | — | |||||||||||||||||
|
Change in valuation allowance
|
28,278 | 12.0 | % | 4,090 | 2.2 | % | (1,768 | ) | (0.5 | )% | ||||||||||||||
|
Impact of foreign operations
|
(40,668 | ) | (17.3 | )% | (38,703 | ) | (20.4 | )% | 3,647 | 1.0 | % | |||||||||||||
|
Reassessment of tax liabilities due to change in estimate
|
162 | 0.1 | % | (917 | ) | (0.5 | )% | 1,533 | 0.4 | % | ||||||||||||||
|
Other, including non-deductible expenses
|
(454 | ) | (0.2 | )% | 1,293 | 0.6 | % | (19 | ) | — | ||||||||||||||
|
Total
|
$ | 86,152 | 36.6 | % | $ | 39,213 | 20.6 | % | $ | 138,884 | 37.6 | % | ||||||||||||
Change in Medicare legislation.
The
$14.5 million tax charge in 2010 is primarily driven by the
reduction in the related deferred tax assets resulting from the
enactment of the Patient Protection and Affordable Care Act (the
“Health Care Act”). The tax treatment of Medicare
Part D subsidies changed during the second quarter of 2010
as a result of the Health Care Act. The Health Care Act includes
a provision eliminating, beginning in the Company’s tax
86
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
year 2014, the tax deductibility of the costs of providing
Medicare
Part D-equivalent
prescription drug benefits to retirees to the extent of the
Federal subsidy received. Accordingly, the Company recorded a
non-recurring, non-cash tax charge to recognize the reduction in
the related deferred tax assets in the period the legislation
was enacted.
Change in valuation allowance.
This item
relates to changes in the Company’s expectations regarding
its ability to realize certain deferred tax assets. In 2010, the
$28.3 million charge primarily relates to the recognition
of a valuation allowance to fully offset the net deferred tax
assets in certain foreign jurisdictions, mostly pertaining to
the Company’s subsidiary in Japan. Due primarily to the
recent negative financial performance of its subsidiary in
Japan, the Company recorded a non-recurring, non-cash tax
expense of $14.2 million during the second quarter of 2010
to recognize a valuation allowance to fully offset the amount of
the subsidiary’s deferred tax assets existing as of the
beginning of the year, as the Company determined it is more
likely than not these assets will not be realized. Additionally,
the Company was not able to benefit current year losses in Japan
during 2010, which further increased the valuation allowance by
$13.3 million.
The following table details the changes in valuation allowance
during the year ended November 28, 2010:
|
Valuation
|
Valuation
|
|||||||||||||||
|
Allowance at
|
Changes in Related
|
Allowance at
|
||||||||||||||
|
November 29,
|
Gross Deferred Tax
|
November 28,
|
||||||||||||||
| 2009 | Asset | Charge | 2010 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
U.S. state net operating loss carryforwards
|
$ | 2,060 | $ | 19 | $ | — | $ | 2,079 | ||||||||
|
Foreign net operating loss carryforwards and other foreign
deferred tax assets
|
70,926 | (4,257 | ) | 28,278 | 94,947 | |||||||||||
| $ | 72,986 | $ | (4,238 | ) | $ | 28,278 | $ | 97,026 | ||||||||
Impact of foreign operations.
The
$40.7 million benefit in 2010 was primarily driven by a
$34.2 million tax benefit arising from the Company’s
implementation of specific plans during the fourth quarter of
2010 to repatriate the prior undistributed earnings of certain
foreign subsidiaries during 2011. As a result of the planned
distribution, as of November 28, 2010, the Company
recognized a deferred tax asset and a corresponding tax benefit
of $34.2 million, for the foreign tax credits in excess of
the associated U.S. federal income tax liability that are
expected to become available upon the planned distribution.
The $38.7 million benefit in 2009 was primarily driven by a
$33.2 million tax benefit arising from the Company’s
implementation of specific plans during the fourth quarter of
2009 to repatriate the prior undistributed earnings of certain
foreign subsidiaries during 2010. As a result of the planned
distribution, as of November 29, 2009, the Company
recognized a deferred tax asset and a corresponding tax benefit
of $33.2 million, for the foreign tax credits in excess of
the associated U.S. federal income tax liability that were
expected to become available upon the planned distribution. This
distribution was completed during 2010 as expected.
87
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
Deferred
Tax Assets and Liabilities
The Company’s deferred tax assets and deferred tax
liabilities were as follows:
|
November 28,
|
November 29,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Basis differences in foreign subsidiaries
|
$ | 34,203 | $ | 33,218 | ||||
|
Foreign tax credit carryforwards
|
195,032 | 136,591 | ||||||
|
State net operating loss carryforwards
|
13,555 | 12,251 | ||||||
|
Foreign net operating loss carryforwards
|
100,796 | 89,931 | ||||||
|
Employee compensation and benefit plans
|
264,828 | 288,741 | ||||||
|
Prepaid royalties
|
44,050 | 85,073 | ||||||
|
Restructuring and special charges
|
12,755 | 15,558 | ||||||
|
Sales returns and allowances
|
34,656 | 31,621 | ||||||
|
Inventory
|
8,249 | 6,719 | ||||||
|
Property, plant and equipment
|
16,189 | 18,516 | ||||||
|
Unrealized gains/losses on investments
|
18,125 | 32,466 | ||||||
|
Other
|
51,533 | 59,335 | ||||||
|
Total gross deferred tax assets
|
793,971 | 810,020 | ||||||
|
Less: Valuation allowance
|
(97,026 | ) | (72,986 | ) | ||||
|
Total net deferred tax assets
|
$ | 696,945 | $ | 737,034 | ||||
|
Current
|
||||||||
|
Deferred tax assets
|
$ | 148,698 | $ | 139,811 | ||||
|
Valuation allowance
|
(10,806 | ) | (4,303 | ) | ||||
|
Total current deferred tax assets
|
$ | 137,892 | $ | 135,508 | ||||
|
Long-term
|
||||||||
|
Deferred tax assets
|
$ | 645,273 | $ | 670,209 | ||||
|
Valuation allowance
|
(86,220 | ) | (68,683 | ) | ||||
|
Total long-term deferred tax assets
|
$ | 559,053 | $ | 601,526 | ||||
Basis differences in foreign subsidiaries.
The
Company recognizes deferred taxes with respect to basis
differences in its investments in foreign subsidiaries that are
expected to reverse in the foreseeable future and which exist
primarily due to undistributed foreign earnings. As described
above, the Company recognized deferred tax assets in 2010 and
2009 relating to the planned repatriation of prior undistributed
earnings of certain foreign subsidiaries.
Foreign tax credit carryforwards.
As of
November 28, 2010, the Company had a gross deferred tax
asset for foreign tax credit carryforwards of
$195.0 million. This asset increased from
$136.6 million in the prior year period primarily due to
the foreign tax credits in excess of the associated
U.S. federal income tax liability arising from the
repatriation of foreign earnings, net of the amount of the
anticipated utilization in the 2010 federal income tax return.
The foreign tax credit carryforward of $195.0 million
existing at November 28, 2010, is subject to expiration
from 2012 to 2017, if not utilized.
88
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
State net operating loss carryforwards.
As of
November 28, 2010, the Company had a gross deferred tax
asset of $13.6 million for state net operating loss
carryforwards of approximately $279.1 million, partially
offset by a valuation allowance of $2.1 million to reduce
this gross asset to the amount that will more likely than not be
realized. These loss carryforwards are subject to expiration
from 2011 to 2030, if not utilized.
Foreign net operating loss carryforwards.
As
of November 28, 2010, cumulative foreign operating losses
of $350.2 million generated by the Company were available
to reduce future taxable income. Approximately
$203.4 million of these operating losses expire between the
years 2011 and 2021. The remaining $146.8 million are
available as indefinite carryforwards under applicable tax law.
The gross deferred tax asset for the cumulative foreign
operating losses of $100.8 million is partially offset by a
valuation allowance of $83.8 million to reduce this gross
asset to the amount that will more likely than not be realized.
Uncertain
Income Tax Positions
As of November 28, 2010, the Company’s total amount of
unrecognized tax benefits was $150.7 million, of which
$87.2 million would impact the Company’s effective tax
rate, if recognized. As of November 29, 2009, the
Company’s total gross amount of unrecognized tax benefits
was $160.5 million, of which $92.0 million would
impact the Company’s effective tax rate, if recognized. The
reduction in gross unrecognized tax benefits was primarily due
to the change in recognition of the benefit associated with
certain tax positions, primarily in the U.S., as a result of the
expiration of applicable statute of limitations.
The following table reflects the changes to the Company’s
unrecognized tax benefits for the year ended November 28,
2010, and November 29, 2009:
| (Dollars in thousands) | ||||
|
Gross unrecognized tax benefits as of November 30, 2008
|
$ | 167,175 | ||
|
Increases related to current year tax positions
|
11,188 | |||
|
Increases related to tax positions from prior years
|
8,222 | |||
|
Decreases related to tax positions from prior years
|
(2,804 | ) | ||
|
Settlement with tax authorities
|
(16,363 | ) | ||
|
Lapses of statutes of limitation
|
(7,344 | ) | ||
|
Other, including foreign currency translation
|
464 | |||
|
Gross unrecognized tax benefits as of November 29, 2009
|
160,538 | |||
|
Increases related to current year tax positions
|
5,305 | |||
|
Increases related to tax positions from prior years
|
1,115 | |||
|
Decreases related to tax positions from prior years
|
(3,465 | ) | ||
|
Settlement with tax authorities
|
(566 | ) | ||
|
Lapses of statutes of limitation
|
(11,093 | ) | ||
|
Other, including foreign currency translation
|
(1,132 | ) | ||
|
Gross unrecognized tax benefits as of November 28, 2010
|
$ | 150,702 | ||
The Company believes that it is reasonably possible that
unrecognized tax benefits could decrease by as much as
$97.9 million within the next twelve months, due primarily
to the potential resolution of a refund claim with the State of
California. However, at this point it is not possible to
estimate whether the Company will realize any significant income
tax benefit upon the resolution of this claim.
89
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
As of November 28, 2010, and November 29, 2009,
accrued interest and penalties primarily relating to
non-U.S. jurisdictions
were $16.6 million and $16.8 million, respectively.
The Company’s income tax returns are subject to examination
in the U.S. federal and state jurisdictions and numerous
foreign jurisdictions. The IRS examination of the Company’s
2003-2008
U.S. federal income tax returns was still in progress as of
November 28, 2010. The following table summarizes the tax
years that are either currently under audit or remain open and
subject to examination by the tax authorities in the major
jurisdictions in which the Company operates:
|
Jurisdiction
|
Open Tax Years | |||
|
U.S. federal
|
2003-2010 | |||
|
California
|
1986-2010 | |||
|
Belgium
|
2008-2010 | |||
|
United Kingdom
|
2007-2010 | |||
|
Spain
|
2006-2010 | |||
|
Mexico
|
2004-2010 | |||
|
Canada
|
2003-2010 | |||
|
Hong Kong
|
2004-2010 | |||
|
Italy
|
2005-2010 | |||
|
France
|
2007-2010 | |||
|
Turkey
|
2006-2010 | |||
|
Japan
|
2005-2010 | |||
| NOTE 18: | RELATED PARTIES |
Directors
Robert D. Haas, a director and Chairman Emeritus of the Company,
is the President of the Levi Strauss Foundation, which is not a
consolidated entity of the Company. During 2010, 2009 and 2008,
the Company donated $3.1 million, $5.5 million and
$14.8 million, respectively, to the Levi Strauss Foundation.
Stephen C. Neal, a director, is chairman of the law firm Cooley
LLP. The firm provided legal services to the Company in 2010 and
2009, and to the Company and Human Resources Committee of the
Company’s Board of Directors in 2008, for which the Company
paid fees of approximately $0.2 million, $0.6 million
and $0.2 million, respectively.
| NOTE 19: | BUSINESS SEGMENT INFORMATION |
The Company manages its business according to three regional
segments: the Americas, Europe and Asia Pacific. Each regional
segment is managed by a senior executive who reports directly to
the chief operating decision maker: the Company’s chief
executive officer. The Company’s management, including the
chief operating decision maker, manages business operations,
evaluates performance and allocates resources based on the
regional segments’ net revenues and operating income. The
Company reports net trade receivables and inventories by segment
as that information is used by the chief operating decision
maker in assessing segment performance. The Company does not
report its other assets by segment as that information is not
used by the chief operating decision maker in assessing segment
performance.
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
In the first quarter of 2010, accountability for information
technology and marketing staff costs of a global nature, that in
prior years were captured in the Company’s geographic
regions, was centralized under corporate management in
conjunction with the Company’s key strategy of driving
productivity. Beginning in 2010, these costs have been
classified as corporate expenses. These costs were not
significant to any of the Company’s regional segments
individually in any of the periods presented herein, and
accordingly business segment information for prior years has not
been revised.
In September 2010, the Company announced its appointment of
three global brand leaders as part of a brand-led organization
aimed at better aligning the Company’s brand presentation
and consumer experience around the world. This announcement did
not alter the way in which the Company currently manages
business operations, evaluates performance or allocates
resources; the Company continues to measure business performance
by region.
Business segment information for the Company was as follows:
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net revenues:
|
||||||||||||
|
Americas
|
$ | 2,549,086 | $ | 2,357,662 | $ | 2,476,370 | ||||||
|
Europe
|
1,105,264 | 1,042,131 | 1,195,596 | |||||||||
|
Asia Pacific
|
756,299 | 705,973 | 728,948 | |||||||||
|
Total net revenues
|
$ | 4,410,649 | $ | 4,105,766 | $ | 4,400,914 | ||||||
|
Operating income:
|
||||||||||||
|
Americas
|
$ | 402,530 | $ | 346,329 | $ | 346,855 | ||||||
|
Europe
|
163,475 | 154,839 | 257,941 | |||||||||
|
Asia Pacific
|
86,274 | 90,967 | 99,526 | |||||||||
|
Regional operating income
|
652,279 | 592,135 | 704,322 | |||||||||
|
Corporate expenses
|
270,918 | 214,047 | 179,250 | |||||||||
|
Total operating income
|
381,361 | 378,088 | 525,072 | |||||||||
|
Interest expense
|
(135,823 | ) | (148,718 | ) | (154,086 | ) | ||||||
|
Loss on early extinguishment of debt
|
(16,587 | ) | — | (1,417 | ) | |||||||
|
Other income (expense), net
|
6,647 | (39,445 | ) | (303 | ) | |||||||
|
Income before income taxes
|
$ | 235,598 | $ | 189,925 | $ | 369,266 | ||||||
91
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Depreciation and amortization expense:
|
||||||||||||
|
Americas
|
$ | 51,050 | $ | 44,492 | $ | 41,580 | ||||||
|
Europe
|
25,485 | 21,599 | 18,250 | |||||||||
|
Asia Pacific
|
11,798 | 11,238 | 11,227 | |||||||||
|
Corporate
|
16,563 | 7,274 | 6,926 | |||||||||
|
Total depreciation and amortization expense
|
$ | 104,896 | $ | 84,603 | $ | 77,983 | ||||||
| November 28, 2010 | ||||||||||||||||||||
|
Asia
|
Consolidated
|
|||||||||||||||||||
| Americas | Europe | Pacific | Unallocated | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Trade receivables, net
|
$ | 360,027 | $ | 105,189 | $ | 69,762 | $ | 18,407 | $ | 553,385 | ||||||||||
|
Inventories
|
313,920 | 158,139 | 104,630 | 3,214 | 579,903 | |||||||||||||||
|
All other assets
|
— | — | — | 2,001,961 | 2,001,961 | |||||||||||||||
|
Total assets
|
$ | 3,135,249 | ||||||||||||||||||
| November 29, 2009 | ||||||||||||||||||||
|
Asia
|
Consolidated
|
|||||||||||||||||||
| Americas | Europe | Pacific | Unallocated | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Trade receivables, net
|
$ | 312,110 | $ | 134,428 | $ | 87,416 | $ | 18,298 | $ | 552,252 | ||||||||||
|
Inventories
|
208,859 | 150,639 | 90,181 | 1,593 | 451,272 | |||||||||||||||
|
All other assets
|
— | — | — | 1,985,857 | 1,985,857 | |||||||||||||||
|
Total assets
|
$ | 2,989,381 | ||||||||||||||||||
Geographic information for the Company was as follows:
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net revenues:
|
||||||||||||
|
United States
|
$ | 2,248,340 | $ | 2,107,055 | $ | 2,197,968 | ||||||
|
Foreign countries
|
2,162,309 | 1,998,711 | 2,202,946 | |||||||||
|
Total net revenues
|
$ | 4,410,649 | $ | 4,105,766 | $ | 4,400,914 | ||||||
92
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Deferred tax assets:
|
||||||||||||
|
United States
|
$ | 646,050 | $ | 677,245 | $ | 578,653 | ||||||
|
Foreign countries
|
50,895 | 59,789 | 61,539 | |||||||||
|
Total deferred tax assets
|
$ | 696,945 | $ | 737,034 | $ | 640,192 | ||||||
| Year Ended | ||||||||||||
|
November 28,
|
November 29,
|
November 30,
|
||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Long-lived assets:
|
||||||||||||
|
United States
|
$ | 337,592 | $ | 270,344 | $ | 273,761 | ||||||
|
Foreign countries
|
169,557 | 181,023 | 155,836 | |||||||||
|
Total long-lived assets
|
$ | 507,149 | $ | 451,367 | $ | 429,597 | ||||||
| NOTE 20: | QUARTERLY FINANCIAL DATA (UNAUDITED) |
Set forth below are the consolidated statements of operations
for the first, second, third and fourth quarters of 2010 and
2009.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Year Ended November 28, 2010
|
Quarter | Quarter | Quarter | Quarter | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 1,016,007 | $ | 957,959 | $ | 1,090,448 | $ | 1,261,494 | ||||||||
|
Licensing revenue
|
19,199 | 18,570 | 18,557 | 28,415 | ||||||||||||
|
Net revenues
|
1,035,206 | 976,529 | 1,109,005 | 1,289,909 | ||||||||||||
|
Cost of goods sold
|
502,278 | 477,108 | 565,393 | 642,947 | ||||||||||||
|
Gross profit
|
532,928 | 499,421 | 543,612 | 646,962 | ||||||||||||
|
Selling, general and administrative expenses
|
425,677 | 430,199 | 457,309 | 528,377 | ||||||||||||
|
Operating income
|
107,251 | 69,222 | 86,303 | 118,585 | ||||||||||||
|
Interest expense
|
(34,173 | ) | (34,440 | ) | (31,734 | ) | (35,476 | ) | ||||||||
|
Loss on early extinguishment of debt
|
— | (16,587 | ) | — | — | |||||||||||
|
Other income (expense), net
|
12,463 | 6,694 | (7,695 | ) | (4,815 | ) | ||||||||||
|
Income before taxes
|
85,541 | 24,889 | 46,874 | 78,294 | ||||||||||||
|
Income tax expense (benefit)
|
29,672 | 43,279 | 20,252 | (7,051 | ) | |||||||||||
|
Net income (loss)
|
55,869 | (18,390 | ) | 26,622 | 85,345 | |||||||||||
|
Net loss attributable to noncontrolling interest
|
485 | 4,009 | 1,556 | 1,007 | ||||||||||||
|
Net income (loss) attributable to Levi Strauss &
Co.
|
$ | 56,354 | $ | (14,381 | ) | $ | 28,178 | $ | 86,352 | |||||||
93
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 28, 2010, NOVEMBER 29, 2009, AND NOVEMBER
30, 2008
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Year Ended November 29, 2009
|
Quarter | Quarter | Quarter | Quarter | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 931,254 | $ | 886,519 | $ | 1,021,829 | $ | 1,183,252 | ||||||||
|
Licensing revenue
|
20,210 | 17,999 | 18,571 | 26,132 | ||||||||||||
|
Net revenues
|
951,464 | 904,518 | 1,040,400 | 1,209,384 | ||||||||||||
|
Cost of goods sold
|
506,343 | 489,141 | 545,985 | 590,892 | ||||||||||||
|
Gross profit
|
445,121 | 415,377 | 494,415 | 618,492 | ||||||||||||
|
Selling, general and administrative expenses
|
339,081 | 359,268 | 396,041 | 500,927 | ||||||||||||
|
Operating income
|
106,040 | 56,109 | 98,374 | 117,565 | ||||||||||||
|
Interest expense
|
(34,690 | ) | (40,027 | ) | (37,931 | ) | (36,070 | ) | ||||||||
|
Other income (expense), net
|
2,989 | (20,260 | ) | (6,696 | ) | (15,478 | ) | |||||||||
|
Income (loss) before taxes
|
74,339 | (4,178 | ) | 53,747 | 66,017 | |||||||||||
|
Income tax expense (benefit)
|
26,349 | (266 | ) | 13,347 | (217 | ) | ||||||||||
|
Net income (loss)
|
47,990 | (3,912 | ) | 40,400 | 66,234 | |||||||||||
|
Net loss (income) attributable to noncontrolling interest
|
79 | (216 | ) | 303 | 997 | |||||||||||
|
Net income (loss) attributable to Levi Strauss &
Co.
|
$ | 48,069 | $ | (4,128 | ) | $ | 40,703 | $ | 67,231 | |||||||
94
Table of Contents
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| Item 9A(T). | CONTROLS AND PROCEDURES |
Evaluation
of disclosure controls and procedure
As of November 28, 2010, we updated our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures for purposes of filing reports under the
Securities and Exchange Act of 1934 (the “Exchange
Act”). This controls evaluation was done under the
supervision and with the participation of management, including
our chief executive officer and our chief financial officer. Our
chief executive officer and our chief financial officer
concluded that at November 28, 2010, our disclosure
controls and procedures (as defined in
Rule 13(a)-15(e)
and 15(d)-15(e) under the Exchange Act) are effective to provide
reasonable assurance that information that we are required to
disclose in the reports that we file or submit to the SEC is
recorded, processed, summarized and reported with the time
periods specified in the SEC’s rules and forms. Our
disclosure controls and procedures are designed to ensure that
such information is accumulated and communicated to our
management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Management’s
annual report on internal control over financial
reporting
We maintain a system of internal control over financial
reporting that is designed to provide reasonable assurance that
our books and records accurately reflect our transactions and
that our established policies and procedures are followed.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Exchange Act). Our management assessed the
effectiveness of our internal control over financial reporting
and concluded that our internal control over financial reporting
was effective as of November 28, 2010. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in
Internal Control — Integrated
Framework
.
As a result of the enactment in our third quarter of the
Dodd-Frank Wall Street Reform and Consumer Protection Act,
“
Exemption for Non-accelerated Filers,”
and in
accordance with Section 989G of that act, we are not
required to provide an attestation report of our independent
registered public accounting firm regarding internal control
over financial reporting for this fiscal year or thereafter,
until such time as we are no longer eligible for the exemption
set forth therein.
Changes
in Internal Controls
We maintain a system of internal control over financial
reporting that is designed to provide reasonable assurance that
our books and records accurately reflect our transactions and
that our established policies and procedures are followed. There
were no changes to our internal control over financial reporting
during our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
| Item 9B. | OTHER INFORMATION |
None.
95
Table of Contents
PART III
| Item 10. | DIRECTORS AND EXECUTIVE OFFICERS |
The following provides information about our directors and
executive officers as of February 3, 2011.
|
Name
|
Age |
Position
|
||||
|
Richard L.
Kauffman
(2)(3)
|
55 | Chairman of the Board of Directors | ||||
|
Robert D.
Haas
(1)(2)(4)
|
68 | Director, Chairman Emeritus | ||||
|
R. John Anderson
|
59 | Director, President and Chief Executive Officer | ||||
|
Fernando
Aguirre
(2)(3)
|
53 | Director | ||||
|
Vanessa J.
Castagna
(1)(4)
|
61 | Director | ||||
|
Robert A.
Eckert
(1)(4)
|
56 | Director | ||||
|
Peter E. Haas
Jr.
(1)(4)
|
63 | Director | ||||
|
Leon J.
Level
(2)(3)
|
70 | Director | ||||
|
Stephen C.
Neal
(2)(4)
|
61 | Director | ||||
|
Patricia Salas
Pineda
(1)(4)
|
59 | Director | ||||
|
Aaron Beng-Keong Boey
|
49 | Executive Vice President and President, Global Denizen tm Brand | ||||
|
James A. Calhoun
|
43 | Executive Vice President and President, Global Dockers ® Brand | ||||
|
Robert L. Hanson
|
47 | Executive Vice President and President, Global Levi’s ® Brand | ||||
|
Blake Jorgensen
|
51 | Executive Vice President and Chief Financial Officer | ||||
| (1) | Member, Human Resources Committee. | |
| (2) | Member, Finance Committee. | |
| (3) | Member, Audit Committee. | |
| (4) | Member, Nominating and Governance Committee. |
Members of the Haas family are descendants of the family of our
founder, Levi Strauss. Peter E. Haas Jr. is a cousin of Robert
D. Haas.
Richard L. Kauffman
, a director since October
2008, was Interim Chairman as of December 3, 2009, and
became Chairman of the Board on February 4, 2010.
Mr. Kauffman most recently was the Chief Executive Officer
and President of Good Energies, Inc. a global investment firm
focusing on renewable energy and energy efficiencies, a position
he held from 2006 to 2010. Prior to that, Mr. Kauffman was
a Managing Director of Goldman Sachs, where he also held
positions as the chairman of the Global Financing Group and a
member of the firm’s Partnership Committee, Commitments
Committee and Investment Banking Division Operating
Committee. Before joining Goldman Sachs in 2004, he was a vice
chairman of Morgan Stanley’s Institutional Securities
Business and co-head of its Banking Department and, prior to
that, vice chairman and a member of the European Executive
Committee of Morgan Stanley International since 1993.
Mr. Kauffman was selected to serve as a director due to his
deep experience in finance, investment banking and global
capital equity markets. His background in these areas as well as
his long history of advising many companies throughout his
career enhances his contribution to board deliberations and
makes him well-suited to lead the board as its chair.
Mr. Kauffman was previously a director of Q-Cells AG until
February 2010, and also sits on the boards of several nonprofit
organizations, including The Brookings Institution.
Robert D. Haas
,
a director since 1980, is
our longest-serving director. He served as Chairman from 1989 to
February 2008 when he was named Chairman Emeritus. Mr. Haas
joined the Company in 1973 and served in a variety of marketing,
planning and operating positions including serving as our Chief
Executive Officer from 1984 to 1999. In 1985, Mr. Haas led
the effort to take the Company private through a leveraged
buyout. As Chief Executive Officer he oversaw a business
turnaround that resulted in more than a decade of substantial
growth, paced
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by international expansion and the launch of the
Dockers
®
brand. Under Mr. Haas’ leadership, the Company
pioneered a number of practices and policies that have been
adopted by corporations and institutions worldwide. These
include HIV/AIDS awareness, education and prevention programs, a
comprehensive code of supplier conduct to promote safe and
healthy working conditions and full medical benefits for the
domestic partners of our employees. Mr. Haas’ deep
experience in all aspects of the business as well as his
familial connection to the Company’s founder, prior leaders
and shareholders, provide him with a unique perspective on
matters discussed by the directors.
R. John Anderson
, our President and Chief
Executive Officer since November 2006, previously served as
Executive Vice President and Chief Operating Officer since July
2006, President of our Global Supply Chain Organization since
2004 and Senior Vice President and President of our Asia Pacific
region since 1998. He joined us in 1979. Mr. Anderson
served as General Manager of Levi Strauss Canada and as
President of Levi Strauss Canada and Latin America from 1996 to
1998. He has held a series of merchandising positions with us in
Europe and the United States, including Vice President,
Merchandising and Product Development for the Levi’s brand
in 1995. Mr. Anderson also served as interim President of
Levi Strauss Europe from 2003 to 2004. Mr. Anderson’s
deep knowledge of company operations as a result of his
extensive global experience serving in a variety of senior
management level positions, including his current role as Chief
Executive Officer, are key to his participation on the board.
Mr. Anderson joined the board of directors of
Harley-Davidson, Inc. in September 2010.
Fernando Aguirre
, a director since October 2010,
is currently Chairman of the Board, President and Chief
Executive Officer of Chiquita Brands International, Inc., a
position he has held since 2004. From 1980 to 2004,
Mr. Aguirre served The Procter & Gamble Company
(P&G), a manufacturer and distributor of consumer products,
in various capacities, including as President of P&G’s
Global Snacks and U.S. Food Products business, President of
Global Feminine Care and President of Special Projects.
Mr. Aguirre brings to the board his experiences as a leader
of large, global consumer brands, and his skills in translating
consumer insights into strategies that drive growth across
cultures.
Vanessa J. Castagna
,
a director since 2007,
led Mervyns LLC department stores as its executive chairwoman of
the board from 2005 until early 2007. Prior to Mervyns LLC,
Ms. Castagna served as chairman and chief executive officer
of JC Penney Stores, Catalog and Internet from 2002 through
2004. She joined JC Penney in 1999 as chief operating officer,
and was both president and Chief Operating Officer of JC Penney
Stores, Catalog and Internet in 2001. Ms. Castagna was
selected to serve on the board due to her extensive retail
leadership experience which brings to the board a valuable
perspective on the retail and wholesale business.
Ms. Castagna is currently a director of SpeedFC and
Carter’s Inc.
Robert A. Eckert
, a director since May 2010, is
currently Chairman of the Board and Chief Executive Officer of
Mattel, Inc., a position he has held since May 2000. He
previously worked for Kraft Foods, Inc. for 23 years, most
recently as President and Chief Executive Officer from October
1997 until May 2000. From 1995 to 1997, Mr. Eckert was
Group Vice President of Kraft Foods, Inc., and from 1993 to
1995, Mr. Eckert was President of the Oscar Mayer foods
division of Kraft Foods, Inc. Mr. Eckert was selected to
join the board due to his experience as a senior executive
engaged with the dynamics of building global consumer brands
through high performance expectations, integrity, and
decisiveness in driving businesses to successful results.
Mr. Eckert is also currently a director of McDonald’s
Corporation since 2003.
Peter E. Haas Jr.
, a director since 1985, is a
director or trustee of each of the Levi Strauss Foundation, Red
Tab Foundation, Joanne and Peter Haas Jr. Fund, Walter and Elise
Haas Fund and the Novato Youth Center Honorary Board, and he is
a Trustee Emeritus of the San Francisco Foundation.
Mr. Haas was one of our managers from 1972 to 1989. He was
Director of Product Integrity of The Jeans Company, one of our
former operating units, from 1984 to 1989. He served as Director
of Materials Management for Levi Strauss USA in 1982 and Vice
President and General Manager in the Menswear Division in 1980.
Mr. Haas’ background in numerous operational roles
specific to the Company and his familial connection to the
Company’s founder enable him to engage in board
deliberations with valuable insight and experience.
Leon J. Level
, a director since 2005, is a former
Chief Financial Officer and director of Computer Sciences
Corporation, a leading global information technology services
company. Mr. Level held ascending and varied financial
management and executive positions at Computer Sciences
Corporation from 1989 to 2006 and previously
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at Unisys Corporation (Corporate Vice President, Treasurer and
Chairman of Unisys Finance Corporation), Burroughs Corporation
(Vice President, Treasurer), The Bendix Corporation (Executive
Director and Assistant Corporate Controller) and Deloitte,
Haskins & Sells (now Deloitte & Touche).
Mr. Level brings to the board his broad financial and
business perspective as well as his deep insight into accounting
and reporting requirements. He serves as our Audit Committee
financial expert. Mr. Level was previously a director of
Allied Waste Management from 2007 until its acquisition by
Republic Services in 2009. He is also currently a director of
UTi Worldwide Inc.
Stephen C. Neal
,
a director since 2007, is
the chairman of the law firm Cooley Godward Kronish LLP. He was
also chief executive officer of the firm from 2001 until
January 1, 2008. In addition to his extensive experience as
a trial lawyer on a broad range of corporate issues,
Mr. Neal has represented and advised numerous boards of
directors, special committees of boards and individual directors
on corporate governance and other legal matters. Prior to
joining Cooley Godward in 1995, Mr. Neal was a partner of
the law firm Kirkland & Ellis. Mr. Neal brings to
the board deep knowledge and broad experience in corporate
governance as well as his perspectives drawn from advising many
companies throughout his career.
Patricia Salas Pineda
, a director since 1991, is
currently Group Vice President, National Philanthropy and the
Toyota USA Foundation for Toyota Motor North America, Inc., an
affiliate of one of the world’s largest automotive firms.
Ms. Pineda joined Toyota Motor North America, Inc. in
September 2004 as Group Vice President of Corporate
Communications and General Counsel. Prior to that,
Ms. Pineda was Vice President of Legal, Human Resources and
Government Relations and Corporate Secretary of New United Motor
Manufacturing, Inc. with which she was associated since 1984.
Ms. Pineda was selected as a member of the board to bring
her expertise in government relations and regulatory oversight,
corporate governance and human resources matters. Her long
tenure on the board also provides valuable historical
perspective. She is currently a director of the Congressional
Hispanic Caucus Institute and a member of the board of advisors
of Catalyst.
Aaron Beng-Keong Boey
is our Executive Vice
President and President of the Global
Denizen
tm
brand and interim Senior Vice President of our Asia Pacific
Levi’s
®
Commercial Operations. Previously, Mr. Boey was Senior Vice
President and President, Levi Strauss Asia Pacific in February
2009 after serving as interim president since October 2008, and
Regional Managing Director in our Asia Pacific business from
2005. Mr. Boey was Regional Managing Director for Jacuzzi,
Inc. from 2003 until he joined us.
James A. Calhoun
is our Executive Vice President
and President of the Global
Dockers
®
brand. Prior to joining us in December 2008, Mr. Calhoun
was Executive Vice President and General Manager of Disney
Consumer Products for North America and Latin America where he
oversaw regional brand management, franchisee planning, and
sales and marketing across licensed product categories,
including Apparel, Accessories, and Footwear. Mr. Calhoun
has extensive international experience. Before Disney,
Mr. Calhoun led businesses that fueled profitable growth
for well-known consumer brands such as Nautica, Nike, and Wilson.
Robert L. Hanson
is our Executive Vice President
and President of the Global
Levi’s
®
brand. Previously, Mr. Hanson was Senior Vice President and
President of Levi Strauss Americas since 2006, President and
Commercial General Manager of the
U.S. Levi’s
®
brand and U.S. Supply Chain Services since 2005, and
President and General Manager of the
U.S. Levi’s
®
brand since 2001. Mr. Hanson was President of the
Levi’s
®
brand in Europe from 1998 to 2000. He began his career with us
in 1988, holding executive-level advertising, marketing and
business development positions in both the
Levi’s
®
and
Dockers
®
brands in the United States before taking his first position in
Europe.
Blake Jorgensen
joined us as Executive Vice
President and Chief Financial Officer in July 2009. Prior to
joining us, Mr. Jorgensen was Chief Financial Officer of
Yahoo! Inc., an internet services company from June 2007 to June
2009. Prior to joining Yahoo!, Mr. Jorgensen was the Chief
Operating Officer and
Co-Director
of Investment Banking at Thomas Weisel Partners, which he
co-founded in 1998. From December 1998 to January 2002,
Mr. Jorgensen served as a Partner and Director of Private
Placement at Thomas Weisel Partners. From December 1996 to
September 1998, Mr. Jorgensen was a Managing Director and
Chief of Staff for the CEO and Executive Committee of Montgomery
Securities and a Principal in the Corporate Finance Department
of Montgomery Securities. Previously, Mr. Jorgensen worked
as a management consultant at MAC Group/Gemini Consulting and
Marakon Associates.
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Our Board
of Directors
Our board of directors currently has ten members. Our board is
divided into three classes with directors elected for
overlapping three-year terms. The term for directors in
Class I (Mr. Aguirre, Mr. R.D. Haas,
Mr. Level and Mr. Neal) will end at our annual
stockholders’ meeting in 2011. The term for directors in
Class II (Ms. Castagna, Mr. P. E. Haas Jr. and
Mr. Kauffman) will end at our annual stockholders’
meeting in 2012. The term for directors in Class III
(Mr. Anderson, Mr. Eckert and Ms. Pineda) will
end at our annual stockholders’ meeting in 2013.
Committees.
Our board of directors has
four committees.
| • | Audit. Our audit committee provides assistance to the board in the board’s oversight of the integrity of our financial statements, financial reporting processes, internal controls systems and compliance with legal requirements. The committee meets with our management regularly to discuss our critical accounting policies, internal controls and financial reporting process and our financial reports to the public. The committee also meets with our independent registered public accounting firm and with our financial personnel and internal auditors regarding these matters. The committee also examines the independence and performance of our internal auditors and our independent registered public accounting firm. The committee has sole and direct authority to engage, appoint, evaluate and replace our independent auditor. Both our independent registered public accounting firm and our internal auditors regularly meet privately with this committee and have unrestricted access to the committee. The audit committee held seven meetings during 2010. |
— Members: Mr. Level (Chair), Mr. Aguirre
and Mr. Kauffman.
Mr. Level is our audit committee financial expert as
currently defined under SEC rules. We believe that the
composition of our audit committee meets the criteria for
independence under, and the functioning of our audit committee
complies with the applicable requirements of, the Sarbanes-Oxley
Act and SEC rules and regulations.
| • | Finance. Our finance committee provides assistance to the board in the board’s oversight of our financial condition and management, financing strategies and execution and relationships with stockholders, creditors and other members of the financial community. The finance committee held three meetings in 2010 and otherwise acted by unanimous written consent. |
— Members: Mr. Kauffman (Chair),
Mr. Aguirre, Mr. R.D. Haas, Mr. Level and
Mr. Neal.
| • | Human Resources. Our human resources committee provides assistance to the board in the board’s oversight of our compensation, benefits and human resources programs and of senior management performance, composition and compensation. The committee reviews our compensation objectives and performance against those objectives, reviews market conditions and practices and our strategy and processes for making compensation decisions and approves (or, in the case of our chief executive officer, recommends to the Board) the annual and long term compensation for our executive officers, including our long term incentive compensation plans. The committee also reviews our succession planning, diversity and benefit plans. The human resources committee held four meetings in 2010. |
— Members: Ms. Pineda (Chair),
Ms. Castagna, Mr. Eckert, Mr. P.E. Haas Jr. and
Mr. R.D. Haas.
| • | Nominating and Governance. Our nominating and governance committee is responsible for identifying qualified candidates for our board of directors and making recommendations regarding the size and composition of the board. In addition, the committee is responsible for overseeing our corporate governance matters, reporting and making recommendations to the board concerning corporate governance matters, reviewing the performance of our chairman and chief executive officer and determining director compensation. The nominating and governance committee held four meetings in 2010. |
— Members: Mr. R.D. Haas (Chair),
Ms. Castagna, Mr. Eckert, Mr. Neal, Mr. P.E.
Haas Jr. and Ms. Pineda.
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Board
Composition and Risk Management Practices
Board
Leadership
While our by-laws do not require separation of the offices of
chairman and chief executive officer, these positions are held
by different individuals. The Board believes that the separation
of the roles of chairman and chief executive officer is a matter
to be addressed as part of the succession planning process for
those roles and that it is in the best interests of the Company
for the board, upon the review and advice of the Nominating and
Governance Committee, to make such a determination when it
elects a new chairman or chief executive officer or otherwise as
the circumstances may require.
Board
Selection Criteria
According to the board’s written membership policy, the
board seeks directors who are committed to the values of the
Company and are, by reason of their character, judgment,
knowledge and experience, capable of contributing to the
effective governance of the Company. Additionally, the board is
committed to maintaining a diverse and engaged board of
directors composed of both stockholders and non-stockholders.
Upon any vacancy on the board, it seeks to fill that vacancy
with any specific skills, experiences or attributes that will
enhance the overall perspective or functioning of the board.
Director
Independence Policy
Although our shares are not registered on a national securities
exchange, we review and take into consideration the director
independence criteria required by both the New York Stock
Exchange and the NASDAQ Stock Market in determining the
independence of our directors. In addition, the charters of our
board committees prohibit members from having any relationship
that would interfere with the exercise of their independence
from management and the Company. The fact that a director may
own stock or voting trust certificates representing stock in the
Company is not, by itself, considered an
“interference” with independence under the committee
charters. Family stockholders or other family member directors
are not eligible for membership on the Audit Committee. These
independence standards are disclosed on our website at
http://www.levistrauss.com/Company/DirectorIndependence.aspx
.
John Anderson, who serves as our full-time President and Chief
Executive Officer, is not considered independent due to his
employment with the Company. Robert A. Eckert will not serve as
a member of the Audit Committee while he has a family member
through marriage who is employed by our independent registered
public accounting firm. The Board does not have a lead director.
Board’s
Role in Risk Management
Management is responsible for the
day-to-day
management of the risks facing the Company, while the board, as
a whole and through its committees, has responsibility for the
oversight of risk management. Management engages the board in
discussions concerning risk periodically and as needed, and
addresses the topic as part of the annual planning discussions
where the board and management review key risks to the
Company’s plans and strategies and the mitigation plans for
those risks. In addition, the Audit Committee of the board has
the responsibility to review the Company’s major financial
risk exposures and the steps management has taken to monitor and
control such exposures, with management, the senior internal
auditing executive and the independent registered public
accounting firm.
Worldwide
Code of Business Conduct
We have a Worldwide Code of Business Conduct which applies to
all of our directors and employees, including the chief
executive officer, the chief financial officer, the controller
and our other senior financial officers. The Worldwide Code of
Business Conduct covers a number of topics including:
| • | accounting practices and financial communications; | |
| • | conflicts of interest; |
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| • | confidentiality; | |
| • | corporate opportunities; | |
| • | insider trading; and | |
| • | compliance with laws. |
A copy of the Worldwide Code of Business Conduct is an exhibit
to this Annual Report on
Form 10-K.
| Item 11. | EXECUTIVE COMPENSATION |
COMPENSATION
DISCUSSION AND ANALYSIS
Our compensation policies and programs are designed to support
the achievement of our strategic business plans by attracting,
retaining and motivating exceptional talent. Our ability to
compete effectively in the marketplace depends on the knowledge,
capabilities and integrity of our leaders. Our compensation
programs help create a high-performance, outcome-driven and
principled culture by holding leaders accountable for delivering
results, developing our employees and exemplifying our core
values of empathy, originality, integrity and courage. In
addition, we believe that our compensation policies and programs
for leaders and employees do not promote risk-taking to any
degree that would have a material adverse effect on the company.
The Human Resources Committee of the Board of Directors (the
“HR Committee”) is responsible for fulfilling the
Board’s obligation to oversee our executive compensation
practices. Each year, the HR Committee conducts a review of our
compensation and benefits programs to ensure that the programs
are aligned with our business strategies, the competitive
practices of our peer companies and our stockholders’
interests.
Compensation
Philosophy and Objectives
Our executive compensation philosophy focuses on the following
key goals:
| • | Attract, motivate and retain high performing talent in an extremely competitive marketplace |
| • | Our ability to achieve our strategic business plans and compete effectively in the marketplace is based on our ability to attract, motivate and retain exceptional leadership talent in a highly competitive talent market. |
| • | Deliver competitive compensation for competitive results |
| • | We provide competitive total compensation opportunities that are intended to attract, motivate and retain a highly capable and results-driven executive team, with the majority of compensation based on the achievements of performance results. |
| • | Align the interests of our executives with those of our stockholders |
| • | Our programs offer compensation incentives designed to motivate executives to enhance total stockholder return. These programs align certain elements of compensation with our achievement of corporate growth objectives (including defined financial targets and increases in stockholder value) as well as individual performance. |
Policies
and Practices for Establishing Compensation Packages
Establishing
the elements of compensation
The HR Committee establishes the elements of compensation for
our named executive officers after an extensive review of market
data on the executives from the peer group described below. The
HR Committee reviews each element of compensation independently
and in the aggregate to determine the right mix of elements, and
associated amounts, for each named executive officer.
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A consistent approach is used for all named executive officers
when setting each compensation element. However, the HR
Committee, and the Board for the CEO, maintains flexibility to
exercise its independent judgment in how it applies the standard
approach to each executive, taking into account unique
considerations existing at an executive’s time of hire, or
the current and future estimated value of previously granted
long-term incentives relative to individual performance.
Competitive
peer group
In determining the design and the amount of each element of
compensation, the HR Committee conducts a thorough annual review
of competitive market information. The HR Committee references
data provided by Hewitt Associates concerning 31 peer companies
in the consumer products, apparel and retail industry segments.
The HR Committee also references data from the Apparel
Industry & Footwear Compensation Survey published by
Salary.com for commercial positions. The peer group is
representative of the types of companies we compete with for
executive talent, which is the primary consideration for
inclusion in the peer group. Revenue size and other financial
measures, such as cash flow and profit margin, are secondary
considerations in selecting the peer companies.
The peer group used in establishing our named executive
officers’ 2010 compensation packages was:
| Company Name | ||
|
Abercrombie & Fitch Co.
|
LVMH Moët Hennessy Louis Vuitton | |
|
Alberto-Culver Company
|
Mattel, Inc. | |
|
AnnTaylor Stores Corporation
|
The Neiman-Marcus Group, Inc. | |
|
Avon Products, Inc.
|
NIKE, Inc. | |
|
The Bon-Ton Stores, Inc.
|
Nordstrom, Inc. | |
|
Charming Shoppes, Inc.
|
Pacific Sunwear of California, Inc. | |
|
The Clorox Company
|
J.C. Penney Company, Inc. | |
|
Colgate-Palmolive Company
|
Phillips-Van Heusen Corporation | |
|
Eddie Bauer Holdings, Inc.
|
Retail Ventures, Inc. | |
|
The Gap, Inc.
|
Revlon, Inc. | |
|
General Mills, Inc.
|
Sara Lee Corporation | |
|
Hasbro, Inc.
|
The Timberland Company | |
|
Kellogg Company
|
Whirlpool Corporation | |
|
Kimberly-Clark Corporation
|
Williams-Sonoma, Inc. | |
|
Kohl’s Corporation
|
Yum! Brands, Inc. | |
|
Limited Brands, Inc.
|
||
Establishing
compensation for named executive officers other than the
CEO
The HR Committee has established guidelines calling for annual
cash compensation (base salary and target annual incentive
bonus) levels of our named executive officers to be set near the
median
(50
th
percentile) of the peer companies, near the
75
th
percentile for long-term incentives and between the
50
th
-75
th
percentiles for total compensation. These relative levels serve
as a general guideline for compensation decisions.
The HR Committee approves all compensation decisions affecting
the named executive officers (other than the CEO) based on
recommendations provided by the CEO. The CEO conducts an annual
performance review of each member of the executive leadership
team against his or her annual objectives and reviews the
relevant peer group data provided by the Human Resources staff.
The CEO then develops a recommended compensation package for
each executive. The HR Committee reviews the recommendations
with the CEO and the Chairman, seeks advice from its consultant
Exequity and approves or adjusts the recommendations as it deems
appropriate. The HR Committee then reports on its decisions to
the full Board.
Establishing
the CEO compensation package
At the completion of each year, the Nominating and Governance
Committee (the “N&G Committee”) assesses the
CEO’s performance against annual objectives that were
established jointly by the CEO and the N&G Committee at the
beginning of that year. The N&G Committee takes into
consideration feedback gathered from Board members
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and the direct reports to the CEO, in addition to the financial
and operating results of the Company for the year, and submits
its performance assessment to the HR Committee. The HR Committee
then reviews the performance assessment and peer group data in
its deliberations. During this decision-making process, the HR
Committee consults with Exequity, which informs the HR Committee
of market trends and conditions, comments on market data
relative to the CEO’s current compensation, and provides
perspective on other company CEO compensation practices. Based
on all of these inputs, in addition to the same guidelines used
for setting annual cash, long-term and total compensation for
the other named executives, described above, the HR Committee
prepares a recommendation to the full Board on all elements of
the CEO compensation. The full Board then considers the HR
Committee’s recommendation and approves the final
compensation package for the CEO.
Role
of executives and third parties in compensation
decisions
Exequity, an independent board and management advisor firm, acts
as the HR Committee’s independent consultant and as such,
advises the HR Committee on industry standards and competitive
compensation practices, as well as on the Company’s
specific executive compensation practices.
In 2010, the HR Committee conducted a review of the market to
understand the capabilities of other executive compensation
firms who primarily work with Boards. Several firms were
interviewed. Based on the interview results, reference checks,
and the Committee’s prior experience with the Exequity
consultant, the Committee decided to retain Exequity as its
consultant.
Executive officers may influence the compensation package
developed by the Board for the CEO by providing input on the
CEO’s performance in the past year. The CEO influences the
compensation packages for each of the other named executive
officers through his recommendations made to the HR Committee.
Elements
of Compensation
The primary elements of compensation for our named executive
officers are:
| • | Base Salary | |
| • | Annual Incentive Awards | |
| • | Long-Term Incentive Awards | |
| • | Retirement Savings and Insurance Benefits | |
| • | Perquisites |
Base
Salary
The objective of base salary is to provide fixed compensation
that reflects what the market pays to individuals in similar
roles with comparable experience. The HR Committee targets base
salaries for each position near the median
(50
th
percentile)
of the peer group. However, the peer group data serves as a
general guideline only and the HR Committee, and for the CEO,
the Board, retains the authority to exercise its independent
judgment in establishing the base salary levels for each
individual. Therefore, the final salary may not be at the median
of the peer group. Merit increases for the named executive
officers are considered by the HR Committee on an annual basis
and are based on the executive’s individual performance
against planned objectives and his or her base salary relative
to the median of that paid to similar executives by the peer
group.
Annual
Incentive Plan
Our Annual Incentive Plan (“AIP”) provides the named
executive officers, and other eligible employees, an opportunity
to share in the success that they help create. The AIP
encourages the achievement of our internal annual business goals
and rewards Company, business unit and individual performance
against those annual objectives. The alignment of AIP with our
internal annual business goals is intended to motivate all
participants to achieve and exceed our annual performance
objectives.
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Performance
measures
Our priorities for 2010 were to strengthen our business in a
challenging global economy and position the Company to return to
long-term profitable growth. Our 2010 AIP goals were aligned
with these key priorities through three performance measures:
| • | Earnings before interest and taxes (“EBIT”), a non-GAAP measure that is determined by deducting from operating income, as determined under generally accepted accounting principles in the United States (“GAAP”), the following: restructuring expense, net curtailment gains from our post retirement medical plan in the United States and pension plans worldwide, and certain management-defined unusual, non-recurring SG&A expense/income items, | |
| • | Days in working capital , a non-GAAP measure defined as the average days in net trade receivables, plus the average days in inventories, minus the average days in accounts payable, where averages are calculated based on ending balances over the past thirteen months, and | |
| • | Net revenues as determined under GAAP. |
We use these measures because we believe they are key drivers in
increasing stockholder value and because every AIP participant
can impact them in some way. EBIT and days in working capital
are used as indicators of our earnings and operating cash flow
performance, and net revenue is used as an indicator of our
growth. These measures may change from time to time based on
business priorities. The HR Committee approves the goals for
each measure and the respective funding scale at the beginning
of each year to incent the executive team and all employee
participants to strive and perform at a high level to meet the
goals. The reward for meeting the AIP goals is set by the HR
Committee and, in recent years, it has ranged from 100% to 80%
of the employee target. If goal levels are not met, but
performance reaches minimum thresholds, participants may receive
partial payouts to recognize their efforts that contributed to
Company performance.
Funding
the AIP pool
The AIP funding, or the amount of money made available in the
AIP pool at the end of the year, is dependent on how actual
performance compares to the goals. Actual performance is
measured after eliminating any variance introduced by foreign
currency movements and other adjustments determined to be
appropriate by management based on business circumstances. The
three measures of EBIT, days in working capital and net revenue
worked together as follows to determine AIP funding:
| • | At the beginning of 2010, when the goals for the three measures were being established, the Company considered the potential impact of the global economic challenges, anticipated to continue through 2010. These challenges were reflected in the 2010 annual business goals. As a result, the 2010 AIP funding was set at a level where the payout under the AIP would be at a rate of only 80% of the employee target if the EBIT, working capital and net revenue goals were fully achieved. This was consistent with the approach we followed in 2009. | |
| • | Actual EBIT performance compared to our EBIT goals determines initial EBIT AIP funding. |
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| • | Actual days in working capital performance compared to our days in working capital goals results in a working capital modifier, which increases or decreases the initial EBIT AIP funding. | |
| • | Actual net revenue performance compared to our net revenue goals determines Net Revenue AIP funding. To ensure that any incremental net revenue meets profitability goals, actual EBIT must meet or exceed our EBIT goals in order for net revenue funding to be in excess of 80%. | |
| • | EBIT funding and Net Revenue funding are multiplied by the respective incentive pool funding weight and are totaled to determine the AIP funding. |
There are multiple AIP pools reflecting the multiplicity of our
businesses and geographic segments. For most employees, the AIP
funding is based on a mix of their respective business
unit’s performance and the performance of the next higher
organizational level. Therefore, the final AIP funding for
employees in a business unit is the resulting weighted sum of
this mix. The intention is to tie individual rewards to the
local business unit that the employee most directly impacts and
to reinforce the message that the same efforts and results have
an impact on the larger organization. For example, the funding
for an employee in one of our European countries is based on a
mixture of the performance of our business in that country and
the overall European region’s business performance.
Likewise, the funding for employees in our European region
headquarters is based on the mixture of total regional
performance and total Company performance. For corporate staff,
employees in such departments as Finance, Human Resources and
Legal who provide support to the entire Company, the funding is
based entirely on total Company performance. For our executive
leadership team, which includes our named executive officers,
their funding is also fully based on total Company performance
as they provide leadership to and hold accountability for the
total Company.
The table below shows the goals for each of our three
performance measures and the actual 2010 funding levels
reflecting the total Company performance:
|
Days in
|
||||||||||||||||
|
Working
|
Actual AIP
|
|||||||||||||||
|
EBIT
|
Capital
|
Net Revenue
|
Funding
|
|||||||||||||
| Goal | Goal | Goal | Level* | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Total Company
|
$ | 400 | 90 | $ | 4,500 | 84.0 | % | |||||||||
| * | The funding results exclude the impacts of foreign currency exchange rate fluctuations on our business results. |
At the close of the fiscal year, the HR Committee reviews and
approves the final AIP funding levels based on the level of
attainment of the designated financial measures at the local,
regional and total Company levels. AIP funding can range from 0%
to a maximum of 175% of the target AIP pool.
Determining
named executives’ AIP targets and actual award
amounts
The AIP targets for the named executive officers are a specific
dollar amount based on a defined percentage of the
executive’s base salary, called the AIP participation rate.
The AIP participation rate is typically based on the
executive’s position and peer group practices.
In determining each executive’s actual AIP award in any
given year, the HR Committee or, with respect to the CEO, the
Board, considers the AIP target, the individual’s
performance and the AIP funding for the respective business unit
of the respective executive. Because the sum of all actual
payments for any given region or business unit cannot exceed the
amount of the AIP funding pool for that unit, the individual
awards reflect both performance against individual objectives
and relative performance against the balance of employees being
paid out of that pool. Executives, like all employees, must be
employed on the date of payment to receive payment, except in
the cases of layoff, retirement, disability or death. The AIP
awards for all employee participants are made in the same
manner, except that the employees’ managers determine the
individual awards.
Although the AIP participation rates of the named executive
officers are targeted at the median
(50
th
percentile) of that established by the peer group, an
executive’s actual award is not formulaic. Like all
employees, the actual AIP award is based on the assessment of
the executive’s performance against his or her annual
objectives and performance relative to his or her peers, in
addition to the AIP funding. Both business and individual annual
objectives are taken into
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account in determining the actual award payments to our named
executive officers. Individual annual objectives include
non-financial goals which are not stated in quantitative terms,
and a particular weighting is not assigned to any one of these
individual goals. The non-financial objectives are not
established in terms of how difficult or easy they are to
attain; rather, they are taken into account in assessing the
overall quality of the individual’s performance. The target
AIP participation rates, target amounts, actual award payments
and actual award payment as a percentage of each named executive
officer’s target payment were as follows:
|
2010 AIP
|
2010 Target
|
2010 AIP Actual
|
Payment as %
|
|||||||||||||||
|
Name
|
Participation Rate | Amount | Award Payment | of Target | ||||||||||||||
|
John Anderson
|
110 | % | $ | 1,402,500 | $ | 1,370,000 | 98 | % | ||||||||||
|
Blake Jorgensen
|
75 | % | 487,500 | 500,000 | 103 | % | ||||||||||||
|
Robert Hanson
|
85 | % | 701,250 | 925,000 | 132 | % | ||||||||||||
|
Aaron
Boey
(1)
|
65 | % | 363,540 | 196,911 | 54 | % | ||||||||||||
|
Jim Calhoun
|
55 | % | 305,525 | 180,000 | 59 | % | ||||||||||||
|
Armin
Broger
(2)
|
65 | % | 666,631 | — | — | |||||||||||||
|
Jaime
Szulc
(3)
|
65 | % | 373,750 | — | — | |||||||||||||
| (1) | Mr. Boey is paid in Singapore Dollars (SGD). For purposes of the table, this amount was converted into U.S. Dollars using an exchange rate of 0.7722, which is the average exchange rate for the last month of the fiscal year. | |
| (2) | Mr. Broger is paid in Euros. For purposes of the table, this amount was converted into U.S. Dollars using an exchange rate of 1.3734, which is the average exchange rate for the last month of the fiscal year. Mr. Broger departed the Company on November 28, 2010, and although he was eligible for a 2010 AIP award payment, he did not receive one. | |
| (3) | Mr. Szulc resigned effective August 31, 2010, and therefore was not eligible for a 2010 AIP award payment per the terms of the plan. |
Long-Term
Incentives
The HR Committee believes a large part of an executive’s
compensation should be linked to long-term stockholder value
creation as an incentive for sustained, profitable growth.
Therefore, our long-term incentives for our named executive
officers are in the form of equity awards and provide reward
opportunities competitive with those offered by companies in the
peer group for similar jobs. The HR Committee targets long-term
incentive award opportunities for our named executive officers
near the 75th percentile of the peer group, although the HR
Committee, and for the CEO, the Board, retains the authority to
exercise its independent judgment in establishing the long-term
incentive award levels for each individual. Should we deliver
against our long-term goals, the long-term equity incentive
awards become a significant portion of the total compensation of
each named executive officer. For more information on the 2010
long-term equity grants, see the 2010 Grants of Plan-Based
Awards table.
The Company’s common stock is not listed on any stock
exchange. Accordingly, the price of a share of our common stock
for all purposes, including determining the value of equity
awards, is established by the Board based on an independent
third-party valuation conducted by Evercore Group LLC
(“Evercore”). The valuation process is typically
conducted two times a year, with interim valuations occurring
from time to time based on stockholder and Company needs. Please
see “Stock-Based Compensation” under Note 1 to
our audited consolidated financial statements included in this
report for more information about the valuation process.
Equity
Incentive Plan
Our omnibus 2006 Equity Incentive Plan (“EIP”) enables
our HR Committee to select from a variety of stock awards in
defining long-term incentives for our management, including
stock options, restricted stock and restricted stock units, and
stock appreciation rights (“SARs”). The EIP permits
the grant of performance awards in the form of equity or cash.
Stock awards and performance awards may be granted to employees,
including named executive officers, non-employee directors and
consultants.
To date, SARs have been the only form of equity granted to our
named executive officers under the EIP. SARs are typically
granted annually with four-year vesting periods and exercise
periods of up to ten years. (See the table entitled
“Outstanding Equity Awards at 2010 Fiscal Year-End”
for details concerning the SARs’ vesting schedule.)
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Table of Contents
The HR Committee chose to grant SARs rather than other available
forms of equity compensation to allow the Company the
flexibility to grant SARs that may be settled in either stock or
cash. The terms of the SAR grants made to our named executive
officers to-date provide for stock settlement only. When a SAR
is exercised and settled in stock, the shares issued are subject
to the terms of the Stockholders’ Agreement and the Voting
Trust Agreement, including restrictions on voting rights
and transfer. SARs that are exercised and settled in stock after
the expiration of the Voting Trust Agreement will not be
subject to the terms of that agreement. After the participant
has held the shares issued under the EIP for six months, he or
she may require the Company to repurchase, or the Company may
require the participant to sell to the Company, those shares of
common stock. The Company’s obligations under the EIP are
subject to certain restrictive covenants in our various debt
agreements (See Note 6 to our audited consolidated
financial statements included in this report for more details).
Long-term
incentive grant practices
The Company does not have any program, plan, or practice to time
equity grants to take advantage of the release of material,
non-public information. Equity grants are made in connection
with compensation decisions made by the HR Committee and the
timing of the Evercore valuation process, and are made under the
terms of the governing plan.
Retirement
Savings and Insurance Benefits
In order to provide a competitive total compensation package, we
offer a qualified 401(k) defined contribution retirement plan to
our U.S. salaried employees through the Employee Savings
and Investment Plan. We also offer a similar defined
contribution retirement savings plan, called the Singapore
Central Provident Fund, to our employees in Singapore. Executive
officers participate in these plans on the same terms as other
salaried employees. The ability of executive officers to
participate fully in these plans is limited by local/national
tax and other related legal requirements. Like many of the
companies in the peer group, the Company offers a nonqualified
supplement to the 401(k) plan, which is not subject to the IRS
and ERISA limitations, through the Deferred Compensation Plan
for Executives and Outside Directors. The Company also offers
its executive officers the health and welfare insurance plans
offered to all employees such as medical, dental, supplemental
life, long-term disability and business travel insurance,
consistent with the practices of the majority of the companies
in the peer group.
In 2004, we froze our U.S. defined benefit pension plan and
increased the Company match under the 401(k) plan. This change
was made in recognition of an employment market that is
characterized by career mobility, and traditional pension plan
benefits are not portable. Of our named executive officers, only
Robert Hanson has adequate years of service to be eligible for
future benefits under the frozen U.S. defined benefit
pension plan.
Defined
contribution retirement plan
The Employee Savings and Investment Plan is a qualified 401(k)
defined contribution savings plan that allows
U.S. employees, including executive officers, to save for
retirement on a pre-tax basis. The Company matches up to a
certain level of employee contributions. In addition, the
Company provides a profit-sharing contribution if we exceed our
internal annual business plan goals. This enables employees to
share in the Company’s success when we outperform our
goals. Beginning in 2011, the profit-sharing contribution
component has been eliminated.
Deferred
compensation plan
The Deferred Compensation Plan for Executives and Outside
Directors is a U.S. nonqualified, unfunded tax effective
savings plan provided to the named executive officers and other
executives, and the outside directors.
Perquisites
The Company believes perquisites are an element of competitive
total rewards. The Company is highly selective in its use of
perquisites, the total value of which is modest. The primary
perquisite provided to the named executive officers is a
flexible allowance to cover expenses such as auto-related
expenses, financial and tax planning, legal assistance and
excess medical costs.
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Table of Contents
Tax
and Accounting Considerations
We have structured our compensation program to comply with
Internal Revenue Code Section 409A. Because our common
stock is not registered on any exchange, we are not subject to
Section 162(m) of the Internal Revenue Code.
Severance
and Change in Control Benefits
The Executive Severance Plan is meant to provide a reasonable
and competitive level of financial transitional support to
executives who are involuntarily terminated. If employment is
involuntarily terminated by the Company due to reduction in
force, layoff or position elimination, the executive is eligible
for severance payments and benefits. Severance benefits are not
payable upon a change in control if the executive is still
employed by or offered a comparable position with the surviving
entity.
Under the 2006 EIP, in the event of a change in control in which
the surviving corporation does not assume or continue the
outstanding SARs program or substitute similar awards for such
outstanding SARs, the vesting schedule of all SARs held by
executives that are still employed upon the change in control
will be accelerated in full as of a date prior to the effective
date of the transaction as the Board determines. This
accelerated vesting structure is designed to encourage the
executives to remain employed with the Company through the date
of the change in control and to ensure that the equity
incentives awarded to the executives are not eliminated by the
surviving company.
Compensation
Committee Report
The Human Resources Committee has reviewed and discussed the
Compensation Discussion and Analysis with management. Based on
the review and discussion, the Committee recommends to the Board
of Directors that the Compensation Discussion and Analysis be
included in the Company’s annual report on
Form 10-K
for the fiscal year ended November 28, 2010.
The Human
Resources Committee
Patricia Salas Pineda (Chair)
Vanessa J. Castagna
Robert Eckert
Peter E. Haas Jr.
Robert D. Haas
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Table of Contents
SUMMARY
COMPENSATION DATA
The following table provides compensation information for
(i) our chief executive officer, (ii) our chief
financial officer, and (iii) three executive officers who
were our most highly compensated officers and who were serving
as executive officers as of the last day of the fiscal year, and
(iv) two additional individuals for whom disclosure would
have been provided, but for the fact that the individuals were
not serving as executive officers at the end of the last
completed fiscal year.
|
Change in
|
||||||||||||||||||||||||||||||||
|
Pension
|
||||||||||||||||||||||||||||||||
|
Value and
|
||||||||||||||||||||||||||||||||
|
Nonqualified
|
||||||||||||||||||||||||||||||||
|
Non-Equity
|
Deferred
|
|||||||||||||||||||||||||||||||
|
Name and
|
Option
|
Incentive Plan
|
Compensation
|
All Other
|
||||||||||||||||||||||||||||
|
Principal Position
|
Year | Salary | Bonus | Awards (2) | Compensation (3) | Earnings (4) | Compensation (5) | Total | ||||||||||||||||||||||||
|
John Anderson
|
2010 | $ | 1,275,000 | $ | — | $ | 2,292,500 | $ | 1,370,000 | $ | 75,141 | $ | 354,852 | $ | 5,367,493 | |||||||||||||||||
|
President and Chief
|
2009 | 1,275,000 | — | 1,852,500 | 1,600,000 | 121,279 | 1,295,424 | 6,144,203 | ||||||||||||||||||||||||
|
Executive Officer
|
2008 | 1,270,192 | — | — | 561,000 | — | 1,211,550 | 3,042,742 | ||||||||||||||||||||||||
|
Blake Jorgensen
|
2010 | 650,000 | — | 1,118,976 | 500,000 | — | 37,323 | 2,306,299 | ||||||||||||||||||||||||
|
Chief Financial Officer
|
2009 | 257,500 | 250,000 | 863,772 | 472,875 | — | 1,974 | 1,846,121 | ||||||||||||||||||||||||
|
Robert Hanson
|
2010 | 743,885 | — | 745,980 | 925,000 | 78,943 | 135,355 | 2,629,163 | ||||||||||||||||||||||||
|
Executive Vice President and
|
2009 | 714,000 | — | 455,814 | 674,730 | — | 113,580 | 1,958,124 | ||||||||||||||||||||||||
|
President, Global
Levi’s
®
Brand
|
2008 | 711,846 | — | — | 249,900 | 12,234 | 111,359 | 1,085,339 | ||||||||||||||||||||||||
|
Aaron
Boey
(1)
|
2010 | 575,528 | — | 516,441 | 223,786 | — | 46,435 | 1,362,190 | ||||||||||||||||||||||||
|
Executive Vice President and
|
2009 | 483,460 | — | 182,323 | 183,459 | — | 88,534 | 937,776 | ||||||||||||||||||||||||
|
President, Global
Denizen
TM
Brand
|
||||||||||||||||||||||||||||||||
|
Jim Calhoun
|
||||||||||||||||||||||||||||||||
|
Executive Vice President and
|
2010 | 557,817 | — | 235,800 | 180,000 | — | 36,166 | 1,009,783 | ||||||||||||||||||||||||
|
President, Global
Dockers
®
Brand
|
||||||||||||||||||||||||||||||||
|
Armin
Broger
(1)
|
2010 | 1,018,710 | — | 192,395 | — | — | 4,779,069 | 5,991,174 | ||||||||||||||||||||||||
|
Senior Vice President and
|
2009 | 1,113,703 | — | 182,323 | 217,172 | — | 676,991 | 2,190,189 | ||||||||||||||||||||||||
|
President Levi Strauss Europe
|
2008 | 950,837 | — | — | 216,315 | — | 401,951 | 1,569,103 | ||||||||||||||||||||||||
|
Jaime Szulc
|
2010 | 502,003 | — | 563,300 | — | — | 1,769,728 | 2,835,031 | ||||||||||||||||||||||||
|
Senior Vice President and
Chief Marketing Officer - Levi’s ® Brand |
||||||||||||||||||||||||||||||||
| (1) | Mr. Boey is paid in Singapore Dollars. For purposes of the table, his 2010 payments were converted into U.S. Dollars using an exchange rate of 0.7722 and for 2009, an exchange rate of 0.7198. | |
| Mr. Broger is paid in Euros. For purposes of the table, his 2010 payments were converted into U.S. Dollars using an exchange rate of 1.3734, for 2009, an exchange rate of 1.4914, and for 2008, an exchange rate of 1.2733. | ||
| These rates were the average exchange rates for the last month of the 2010, 2009 and 2008 fiscal years, respectively. | ||
| (2) | These amounts reflect the aggregate grant date fair value computed in accordance with the Company’s accounting policy for stock-based compensation. For a description of the assumptions used in the calculation of these amounts, see Notes 1 and 11 of the audited consolidated financial statements included elsewhere in this report. | |
| Mr. Broger forfeited $98,758 of his 2009 SAR grant and $193,395 of his 2010 SAR grant based on his termination date of November 28, 2010. | ||
| Mr. Szulc forfeited $563,300 of his 2010 SAR grant based on his termination date of August 31, 2010. | ||
| (3) | These amounts reflect the AIP awards made to the named executive officers. | |
| For Mr. Boey, the 2010 amount reflects an AIP payment of $196,911 and a Long-term Incentive Plan (LTIP) payment of $26,875. LTIP is the cash-based long-term incentive plan for certain employee levels below the named executive officer level, in which Mr. Boey participated prior to his becoming a named executive officer but which was paid out as part of his 2010 compensation. | ||
| (4) | For Mr. Anderson, the 2010 amount reflects the change in his Australian pension benefits value from November 29, 2009, to November 28, 2010. | |
| For Mr. Hanson, the 2010 change in U.S. pension value is due solely to changes in actuarial assumptions used in determining the present value of the benefits. These assumptions, such as discount rates, age-rating and mortality, may vary from year-to-year. Effective November 28, 2004, we froze our U.S. pension plan for all salaried employees. Only years in which the pension value increased are reported. | ||
| (5) | For Mr. Anderson, the 2010 amount reflects a Company 401(k) match of $18,375, a 401(k) excess plan match of $198,375, and an executive allowance of $35,597, $20,597 of which was toward the provision of a car and $15,000 of which was for legal, financial or other similar |
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| expenses. In addition, the amount reflects a payment of $46,546 for ongoing home leave benefits and $39,886 tax gross-up of those benefits, per his employment contract. | ||
| For Mr. Jorgensen, the 2010 amount reflects a Company 401(k) match of $18,375 and an executive allowance of $18,948, $15,000 of which was for legal, financial or other similar expenses. | ||
| For Mr. Hanson, the 2010 amount reflects a Company 401(k) match of $18,375, a 401(k) excess plan match of $89,146 and an executive allowance of $27,698, $23,750 of which was for legal, financial or other similar expenses. | ||
| For Mr. Boey, the 2010 amount reflects an executive allowance of $36,550, $34,749 of which was toward the provision of a car and employer retirement plan contributions. These amounts are based on the foreign exchange rates noted above. | ||
| For Mr. Calhoun, the 2010 amount reflects a Company 401(k) match of $14,700, a relocation allowance of $10,518 and an executive allowance of $10,948 which was for legal, financial or other similar expenses. | ||
| For Mr. Broger, the 2010 amount reflects items provided under his employment contract using the foreign exchange rates noted above. The 2010 amount reflects a notice payment of $679,833 and $3,384,435 in connection with his departure from the Company as reported in the Current Report on Form 8-K filed on September 21, 2010. In addition, the amount reflects $27,358 for tax administration and legal fees, $59,165 as a housing allowance, $51,913 for children’s schooling, a car provided for Mr. Broger’s use valued at $32,842, $122,245 for the purchase of individual pension insurance, and a tax protection benefit of $421,277 based on his Netherlands tax rate. | ||
| For Mr. Szulc, the 2010 amount reflects a payment of $1,516,125 in connection with his departure from the Company as reported in the Current Report on Form 8-K filed on August 12, 2010. In addition, the 2010 amount reflects a Company 401(k) match of $18,375, a 401(k) excess plan match of $22,288 and an executive allowance of $17,961, $15,000 of which was for legal, financial or other similar expenses. The amount also reflects a payment of $54,252 for relocation assistance, $45,668 of which was the relocation allowance and the remainder was a tax gross up, $87,867 for temporary housing assistance, of which $31,093 was the tax gross up amount, and $48,049 for home leave, of which $10,905 was the tax gross up amount. |
Other
Matters
Employment
Contracts
Mr. Anderson
. We have an
employment arrangement with Mr. Anderson effective
November 27, 2006. The arrangement provides for a minimum
base salary of $1,250,000. His base salary has since been
adjusted, and may be further adjusted, by annual merit
increases. Mr. Anderson is also eligible to participate in
our AIP at a target participation rate of 110% of base salary.
Under the terms of his employment arrangement, Mr. Anderson
also received benefits to assist with the relocation of
Mr. Anderson and his family from Singapore to
San Francisco, California as follows: a one-time
irrevocable gross payment of $5,800,000, of which $3,800,000 was
paid in November 2006 and $1,000,000 was paid in each of January
2008 and January 2009, availability of a company-paid apartment
and automobile while his family remained in Singapore; prior to
their relocation, temporary housing in San Francisco upon
his arrival and application of his Australian hypothetical tax
rate on his 2006 Annual Incentive Plan and final 2006 Management
Incentive Plan payments.
In addition to the foregoing arrangements, Mr. Anderson was
considered a global assignee during the period that he was
employed with us in Singapore in 2006. Our approach for global
assignee employees is to ensure that individuals working abroad
are compensated as they would be if they were based in their
home country, in this case Australia, by offsetting expenses
related to a global assignment. This approach covers all areas
that are affected by the assignment, including salary, cost of
living, taxes, housing, benefits, savings, schooling and other
miscellaneous expenses. Although Mr. Anderson was no longer
formally considered a global assignee upon his assuming the
President and Chief Executive Officer role at the beginning of
2007, his family’s relocation from Singapore to the United
States occurred throughout the middle of 2007. Therefore,
certain global assignee benefits were provided to
Mr. Anderson during 2007 as he completed the transition.
Mr. Anderson also receives standard employee healthcare,
life insurance, long-term savings program, as well as relocation
program benefits. He also receives benefits under our various
executive perquisite programs with an annual value of less than
$30,000. Mr. Anderson continues to be eligible for ongoing
home leave benefits. The portions of these benefits that were
paid in 2010, 2009 and 2008 are reflected in the Summary
Compensation Table.
Mr. Anderson’s employment is at-will and may be
terminated by us or by Mr. Anderson at any time.
Mr. Anderson does not receive any separate compensation for
his services as a member of our board of directors.
Mr. Jorgensen
. We entered into an
employment arrangement with Mr. Jorgensen, effective
July 1, 2009. The employment arrangement with
Mr. Jorgensen provides for an annual base salary of
$650,000. His base salary has
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Table of Contents
since been adjusted, and may be further adjusted, by annual
merit increases. Mr. Jorgensen is also eligible to
participate in our AIP at a target participation rate of 75% of
his base salary. His 2009 award was guaranteed at a minimum of
50% of the target value, assuming a full-year of employment. He
also received a one-time signing bonus of $250,000 which is
subject to prorated repayment if his employment with the Company
does not exceed twenty-four months under certain conditions.
Mr. Jorgenson also participates in our 2006 Equity
Incentive Plan and received 82,264 SAR units, which included a
standard grant of 41,132 units and a one-time special grant
of 41,132 units. In addition, Mr. Jorgenson received
1.5 times the standard grant level in 2010.
Mr. Jorgensen also receives standard employee healthcare,
life insurance and long-term savings program benefits, as well
as benefits under our various executive perquisite programs,
including a cash allowance of $15,000 per year.
Mr. Jorgensen’s employment is at-will and may be
terminated by us or by Mr. Jorgensen at any time.
Mr. Hanson
. We have an employment
arrangement with Mr. Hanson effective August 16, 2010.
The arrangement provides for a minimum base salary of $825,000.
His base salary may be adjusted annually based on merit
increases. The arrangement also provides for a grant of 1.5
times the standard SAR grant awarded to eligible executives in
2011 under our 2006 Equity Incentive Plan. Mr. Hanson is
eligible to participate in our AIP at a target participation
rate of 85% of his base salary.
Mr. Hanson also receives standard employee healthcare, life
insurance and long-term savings program benefits, as well as
benefits under our various executive perquisite programs,
including a cash allowance of $15,000 per year.
Mr. Hanson’s employment is at-will and may be
terminated by us or by Mr. Hanson at any time.
Mr. Boey
. We have an employment
arrangement with Mr. Boey effective September 20,
2010. Mr. Boey is a resident of Singapore where his
employment is also based. The arrangement provides for a minimum
base salary of SGD 814,000 (US $600,960 using an exchange rate
of 1.3545 as of August 31, 2010). His base salary may be
adjusted annually based on merit increases. The arrangement also
provides for a grant of 1.5 times the standard SAR grant awarded
to eligible executives in 2011 under our 2006 Equity Incentive
Plan. Mr. Boey is eligible to participate in our AIP at a
target participation rate of 70% of his annual base salary.
Mr. Boey also receives standard employee healthcare, life
insurance and long-term savings program benefits, as well as
benefits under our various executive perquisite programs.
Mr. Boey’s employment is at-will and may be terminated
by us or by Mr. Boey at any time.
Mr. Calhoun
. We have an employment
arrangement with Mr. Calhoun effective September 20,
2010. The arrangement provides for a minimum base salary of
$575,000. His base salary may be adjusted annually based on
merit increases. The arrangement also provides for an initial
grant of 1.5 times the standard SAR grant awarded to eligible
executives in 2011 under our 2006 Equity Incentive Plan.
Mr. Calhoun is eligible to participate in our AIP at a
target participation rate of 65% of his base salary.
Mr. Calhoun also receives standard employee healthcare,
life insurance and long-term savings program benefits, as well
as benefits under our various executive perquisite programs,
including a cash allowance of $15,000 per year.
Mr. Calhoun’s employment is at-will and may be
terminated by us or by Mr. Calhoun at any time.
Mr. Broger
.
We entered into an
employment contract with Mr. Broger, effective
February 26, 2007. Mr. Broger’s position was
eliminated from the Company’s executive officer positions
effective September 30, 2010, and he departed from the
Company on November 28, 2010.
Mr. Broger is a resident of the Netherlands, and his
employment was based in Brussels. Our employment contract with
Mr. Broger was structured in a manner consistent with
European employment practices for senior executives. Therefore,
Mr. Broger’s compensation and benefits were different
from our
U.S.-based
named executive officers. Under the terms of his employment
agreement, Mr. Broger was offered a base salary at an
annual rate of EUR 725,000, which was subsequently adjusted
by annual merit increases during his period of employment.
Mr. Broger was eligible to participate in our AIP at a
target participation rate of 65% of base salary, except that in
111
Table of Contents
2007 only, he had a target participation rate of 100% of his
base salary. Mr. Broger received a one-time sign-on bonus
of EUR 550,000 net, and ongoing pension benefits, subsidies
for housing and his children’s education, life insurance
and car usage benefits, and certain de minimus perquisites.
His agreement also provided for a grant with a target value of
$1,500,000 under the Company’s previous Senior Executive
Long-Term Incentive Plan which, because that plan was replaced
by the Equity Incentive Plan, was converted to a SAR grant. We
also agreed to provide Mr. Broger tax protection, similar
to our global assignment practices described above.
His employment contract provided that in the case of
termination, for reasons other than cause, we would provide
Mr. Broger with eight months’ notice in addition to a
lump sum payment equal to two times his annual base salary and
two times his AIP target amount at the time of termination. In
addition, in exchange for a six month non-compete restriction,
we would pay a one-time payment of six months’ salary.
In connection with his departure on November 28, 2010, the
Company paid Mr. Broger termination payments consistent
with his employment agreement. He forfeited a portion of his
2009 SAR grant and all of his 2010 grant upon his departure from
the Company.
Mr. Szulc
. We entered into an
employment arrangement with Mr. Szulc effective
August 31, 2009. Mr. Szulc departed from the Company
effective August 31, 2010.
The arrangement provided for a minimum base salary of $575,000
and a one-time signing bonus of $150,000 which was subject to
prorated repayment if his employment with the Company did not
exceed twelve months under certain conditions. Mr. Szulc
was also eligible to participate in AIP at a target
participation rate of 65%. Mr. Szulc also participated in
the Company’s 2009 Equity Incentive Plan and received a SAR
grant of 43,000 units in February 2010, which reflected
one-half of a standard grant prorated for 2009, and one and
one-half of a standard grant for 2010. Mr. Szulc received
standard employee healthcare, life insurance and long-term
savings program benefits, as well as benefits under our various
executive perquisite programs. In addition, Mr. Szulc was
eligible for relocation benefits that included six months of
temporary living assistance, a one-time payment of $50,000
towards the purchase of a home and an additional $30,000 payment
to cover home loan interest payments. He was also eligible to be
reimbursed for the cost of up to 27 round trip airline tickets
(equivalent to one trip per week for six months) between Miami
Beach, Florida and San Francisco, California for his family
and himself while they were still residing in Miami Beach. In
addition, Mr. Szulc was eligible to receive three
Company-paid home leave trips (one trip per year for three
years) to Brazil for his family and himself.
In connection with his departure, the Company provided
Mr. Szulc a payment of $1,516,125. He forfeited his 2010
SAR grant upon his departure from the Company.
2010
Grants of Plan-Based Awards
The following table provides information on awards under our
2010 Annual Incentive Plan and stock appreciation rights granted
under the Equity Incentive Plan in 2010 to each of our named
executive officers. The 2010 actual AIP awards for our named
executive officers are disclosed in the Summary Compensation
Table.
|
Estimated Future Payouts
|
||||||||||||||||||||||||||||
|
Under Non-Equity
|
||||||||||||||||||||||||||||
| Incentive Plan Awards | All Other Option Awards | |||||||||||||||||||||||||||
|
Number of
|
||||||||||||||||||||||||||||
|
Securities
|
Exercise or Base
|
|||||||||||||||||||||||||||
|
Underlying
|
Price of Option
|
Full Grant
|
||||||||||||||||||||||||||
|
Name
|
Grant Date | Threshold | Target | Maximum | Options (1) | Awards (2) | Date Value (3) | |||||||||||||||||||||
|
John Anderson
|
Feb. 4, 2010 | $ | — | $ | 1,402,500 | $ | 2,805,000 | $ | 175,000 | $ | 36.50 | $ | 2,292,500 | |||||||||||||||
|
Blake Jorgensen
|
Feb. 4, 2010 | — | 487,500 | 975,000 | 85,418 | 36.50 | 1,118,976 | |||||||||||||||||||||
|
Robert Hanson
|
Feb. 4, 2010 | — | 701,250 | 1,402,500 | 56,945 | 36.50 | 745,980 | |||||||||||||||||||||
|
Aaron Boey
|
Feb. 4, 2010 | — | 363,540 | 727,080 | 39,423 | 36.50 | 516,441 | |||||||||||||||||||||
|
Jim Calhoun
|
Feb. 4, 2010 | — | 305,525 | 611,050 | 18,000 | 36.50 | 235,800 | |||||||||||||||||||||
|
Armin
Broger
(4)
|
Feb. 4, 2010 | — | 666,631 | 1,333,262 | 14,763 | 36.50 | 193,395 | |||||||||||||||||||||
|
Jaime
Szulc
(4)
|
Feb. 4, 2010 | — | 373,750 | 747,501 | 43,000 | 36.50 | 563,300 | |||||||||||||||||||||
| (1) | Reflects SARs granted in 2010 under the Equity Incentive Plan. | |
| (2) | The exercise price is based on the fair market value of the Company’s common stock as of the grant date established by the Evercore valuation process. |
112
Table of Contents
| (3) | These amounts reflect the aggregate grant date fair value computed in accordance with the Company’s accounting policy for stock-based compensation for awards granted under the Equity Incentive Plan. | |
| (4) | Under the terms of the Equity Incentive Plan, Mr. Broger and Mr. Szulc forfeited their 2010 SARs based on their termination dates. |
Outstanding
Equity Awards at 2010 Fiscal Year-End
The following table provides information on the current
unexercised and unvested SAR holdings by the Company’s
named executive officers as of November 28, 2010. The
vesting schedule for each grant is shown following this table.
| SAR Awards | ||||||||||||||||
|
Number of
|
Number of
|
|||||||||||||||
|
Securities
|
Securities
|
|||||||||||||||
|
Underlying
|
Underlying
|
SAR
|
SAR
|
|||||||||||||
|
Unexercised SARs
|
Unexercised SARs
|
Exercise
|
Expiration
|
|||||||||||||
|
Name
|
Exercisable | Unexercisable (1) | Price (2) | Date | ||||||||||||
|
John Anderson
|
462,696 | — | $ | 42.00 | 12/31/2012 | |||||||||||
| 103,713 | 20,743 | 68.00 | 8/1/2017 | |||||||||||||
| 68,750 | 81,250 | 24.75 | 2/5/2016 | |||||||||||||
| — | 175,000 | 36.50 | 2/4/2017 | |||||||||||||
|
Blake Jorgensen
|
29,135 | 53,129 | 25.50 | 7/8/2016 | ||||||||||||
| — | 85,418 | 36.50 | 2/4/2017 | |||||||||||||
|
Robert Hanson
|
127,242 | — | 42.00 | 12/31/2012 | ||||||||||||
| 25,928 | 5,186 | 68.00 | 8/1/2017 | |||||||||||||
| 16,916 | 19,992 | 24.75 | 2/5/2016 | |||||||||||||
| — | 56,945 | 36.50 | 2/4/2017 | |||||||||||||
|
Aaron Boey
|
6,766 | 7,997 | 24.75 | 2/5/2016 | ||||||||||||
| — | 39,423 | 36.50 | 2/4/2017 | |||||||||||||
|
Jim Calhoun
|
11,400 | 13,472 | 24.75 | 2/5/2016 | ||||||||||||
| — | 18,000 | 36.50 | 2/4/2017 | |||||||||||||
|
Armin Broger
|
49,837 | 4,531 | 53.25 | 2/26/2013 | ||||||||||||
| 14,143 | 2,829 | 68.00 | 8/1/2017 | |||||||||||||
| 6,766 | 7,997 | 24.75 | 2/5/2016 | |||||||||||||
| (1) | SAR Vesting Schedule |
|
Grant Date
|
Exercise Price |
Vesting Schedule
|
||||
|
7/13/2006
|
$ | 42.00 | 1/24 th monthly vesting beginning 1/1/08 | |||
|
2/26/2007
|
$ | 53.25 | 1/24 th monthly vesting beginning 2/26/09 | |||
|
8/1/2007
|
$ | 68.00 | 25% vested on 7/31/08; monthly vesting over remaining 36 months | |||
|
2/5/2009
|
$ | 24.75 | 25% vested on 2/4/10; monthly vesting over remaining 36 months | |||
|
7/8/2009
|
$ | 25.50 | 25% vested on 7/7/10; monthly vesting over remaining 36 months | |||
|
2/4/2010
|
$ | 36.50 | 25% vested on 2/3/11; monthly vesting over remaining 36 months | |||
| The named executive officers may only exercise vested SARs during certain times of the year under the terms of the Equity Incentive Plan. | ||
| (2) | The SAR exercise prices reflect the fair market value of the Company’s common stock as of the grant date as established by the Evercore valuation process. Upon the vesting and exercise of a SAR, the recipient will receive shares of common stock (or, during the period of time that the Voting Trust Agreement is effective, a voting trust certificate representing shares of common stock) in an amount equal to the product of (i) the excess of the per share fair market value of the Company’s common stock on the date of exercise over the exercise price, multiplied by (ii) the number of shares of common stock with respect to which the SAR is exercised. |
113
Table of Contents
Executive
Retirement Plans
Robert
Hanson
Effective November 28, 2004, we froze our U.S. pension
plan for all salaried employees. Of our named executive
officers, only Mr. Hanson has adequate years of service to
be eligible for benefits under the frozen defined benefit
pension plan. The normal retirement age is 65 with five years of
service; early retirement age is 55 with 15 years of
service. Mr. Hanson is ineligible for early retirement at
this time. If he elects to receive his benefits before normal
retirement age, the accrued benefit is reduced by an applicable
factor based on the number of years before normal retirement.
Benefits are 100% vested after five years of service, measured
from the date of hire.
There are two components to this pension plan, the Home Office
Pension Plan (“HOPP”), an IRS qualified defined
benefit plan, which has specific compensation limits and rules
under which it operates, and the Supplemental Benefits
Restoration Plan (“SBRP”), a non-qualified defined
benefit plan, that provides benefits in excess of the IRS limit.
The benefit formula under the HOPP is the following:
| a) | 2% of final average compensation (as defined below) multiplied by the participant’s years of benefit service (not in excess of 25 years), less | |
| b) | 2% of Social Security benefit multiplied by the participant’s years of benefit service (not in excess of 25 years), plus | |
| c) | 0.25% of final average compensation multiplied by the participant’s years of benefit service earned after completing 25 years of service. |
Final average compensation is defined as the average
compensation (comprised of base salary, commissions, bonuses,
incentive compensation and overtime earned for the fiscal year)
over the five consecutive plan years producing the highest
average out of the ten consecutive plan years immediately
preceding the earlier of the participant’s retirement date
or termination date.
The benefit formula under the SBRP is the excess of
(a) over (b):
| a) | Accrued benefit as described above for the qualified pension plan determined using non-qualified compensation and removing the application of maximum annuity amounts payable from qualified plans under Internal Revenue Code Section 415(b); | |
| b) | Actual accrued benefit from the qualified pension plan. |
The valuation method and assumptions are as follows:
| a) | The values presented in the Pension Benefits table are based on certain actuarial assumptions as of November 29, 2009; see Notes 1 and 8 of the audited consolidated financial statements included elsewhere in this report for more information. | |
| b) | The discount rate and post-retirement mortality utilized are based on information presented in the pension footnotes. No assumptions are included for early retirement, termination, death or disability prior to normal retirement at age 65. | |
| c) | Present values incorporate the normal form of payment of life annuity for single participants and 50% joint and survivor for married participants. |
114
Table of Contents
Pension
Benefits
The following table provides information regarding executive
retirement arrangements applicable to Mr. Hanson as of
November 28, 2010.
|
Present Value of
|
||||||||||||||
|
Number of Years
|
Accumulated
|
Payments
|
||||||||||||
|
Credited Service as
|
Benefits as of
|
During Last
|
||||||||||||
|
Name
|
Plan Name
|
of 11/28/10 | 11/28/10 | Fiscal Year | ||||||||||
|
Robert Hanson
|
U.S. Home Office Pension Plan (qualified plan)
|
16.8 | $ | 243,877 | $ | — | ||||||||
|
U.S. Supplemental Benefit Restoration Plan (non-qualified plan)
|
16.8 | 619,821 | — | |||||||||||
|
Total
|
$ | 863,698 | $ | — | ||||||||||
Non-Qualified
Deferred Compensation
The Deferred Compensation Plan for Executives and Outside
Directors (“Deferred Compensation Plan”) is a
U.S. nonqualified, unfunded tax effective savings plan
provided to the named executive officers, among other executives
and the directors, as part of competitive compensation.
Participants may elect to defer all or a portion of their base
salary and AIP payment and may elect an in-service
and/or
retirement distribution. Executive officers who defer salary or
bonus under this plan are credited with market-based returns
depending upon the investment choices made by the executive
applicable to each deferral. The investment options under the
plan, which closely mirror the options provided under our
qualified 401(k) plan, include a number of mutual funds with
varying risk and return profiles. Participants may change their
investment choices as frequently as they desire, consistent with
our 401(k) plan.
In addition, under the Deferred Compensation Plan, the Company
provides a match on all deferrals, up to 10% of eligible
compensation that cannot be provided under the qualified 401(k)
plan due to IRS qualified plan compensation limits. The amounts
in the table reflect non-qualified contributions over the 401(k)
limit by the executive officers and the resulting Company match.
The table below reflects the 2010 contributions to the
non-qualified Deferred Compensation Plans for the named
executive officers that participate in the plans, as well as the
earnings and balances under the plans.
|
Aggregate
|
Aggregate
|
|||||||||||||||||||
|
Registrant
|
Executive
|
Aggregate
|
Withdrawals /
|
Balance at
|
||||||||||||||||
|
Name
|
Contributions | Contributions | Earnings | Distributions | November 28, 2010 | |||||||||||||||
|
John
Anderson
(1)
|
$ | 198,375 | $ | 264,500 | $ | 325,669 | $ | — | $ | 3,129,030 | ||||||||||
| — | — | — | — | 4,048,719 | (2) | |||||||||||||||
| — | — | — | — | 1,146,257 | (3) | |||||||||||||||
|
Robert
Hanson
(1)
|
89,146 | 118,861 | 68,459 | — | 747,647 | |||||||||||||||
|
Aaron
Boey
(4)
|
8,621 | 11,815 | — | — | — | |||||||||||||||
|
Jaime
Szulc
(5)
|
22,288 | 29,718 | 3,266 | 55,272 | — | |||||||||||||||
| (1) | For Mr. Anderson and Mr. Hanson, these amounts reflect the 401(k) excess plan match contributions made by the Company and are reflected in the Summary Compensation Table under All Other Compensation. | |
| (2) | While Mr. Anderson was the President of our Asia Pacific region, he participated in a Supplemental Executive Incentive Plan, an unfunded plan to which the Company contributed 20% of his base salary and annual bonus each year. The plan was frozen as of November 26, 2006, when he assumed the role of CEO and no further contributions were made. Upon Mr. Anderson’s termination, without cause, he will be paid out the balance of his accrued benefits in a lump sum. Mr. Anderson’s benefits under this plan are in Australian Dollars. For purposes of the table, these amounts were converted into U.S. Dollars using an exchange rate of 0.904, which was the average exchange rate for the last month of the 2007 fiscal year. | |
| (3) | Mr. Anderson previously participated in the Levi Strauss Australia Staff Superannuation Plan that applied to all employees in Australia. Plan benefits are similar to a U.S. defined contribution plan benefit, which are based on both company and participant contributions. Employee accounts are tied to the investment market and therefore, may vary from year-to-year. Mr. Anderson ceased to be an active participant in that plan in 1998, and is accruing no further company contributions under the plan. Part of his benefit continues to vest over time. Full vesting of his benefit is achieved at age 60. For purposes of the table, these amounts were converted into U.S. Dollars using an exchange rate of 0.9926, which was the average exchange rate for the last month of the 2010 fiscal year. |
115
Table of Contents
| (4) | The CPF is a government-managed program. As a result, we do not have access to information regarding Mr. Boey’s account activity. | |
| (5) | For Mr. Szulc, these amounts reflect the 401(k) excess match contributions made by the Company and are reflected in the Summary Compensation Table under All Other Compensation. In addition, Mr. Szulc elected to receive a distribution of his total account balance based on his termination from the Company. He therefore, had a zero aggregate balance as of November 28, 2010. |
Aaron
Boey
Mr. Boey participates in the Singapore Central Provident
Fund (CPF). The CPF, a type of deferred compensation/defined
contribution plan, is a government-run social security program.
Funds are contributed both by the employee and the employer and
can be used for retirement, home ownership, healthcare expenses,
a child’s tertiary education, investments and insurance.
The plan is funded by mandatory contributions by both the
employer and employee. Rates of employee and employer
contributions vary based on the employee’s age and a
pre-set salary limit, currently SGD 4,500 per month. The rates
vary from 5-20% of monthly salary for employee’s
contributions and 5-15.5% for employer’s contributions.
Effective March 2011, the yearly employer’s CPF
contribution limit will be 15.5% or SGD 11,682 based on the
salary limit of SGD 4,500 per month for all employees.
Individuals may begin drawing down from this account starting
from age 55 after setting aside the CPF Minimum Sum. The
CPF Minimum Sum can be used to buy CPF LIFE, a lifelong annuity
administered by the CPF Board. If the individual chooses to
remain in the CPF Minimum Sum Scheme, the sum of money can also
be used to purchase a private annuity from a participating
insurance company, be placed with a participating bank, or left
it in their own Retirement Accounts. If the individual chooses
either CPF LIFE or to keep the money in their Retirement
Accounts, they will receive monthly payments from the scheme
they chose starting from their draw-down age (currently at
age 62).
Armin
Broger
Per Mr. Broger’s employment contract, we agreed to pay
12% of his gross base salary for pension/retirement savings
purposes during his period of employment. Part of that amount
was paid directly to Mr. Broger in cash, so he could
purchase individual pension insurance. The remaining portion was
to be contributed to a company-managed retirement plan, but no
contributions were made by Mr. Broger. The funds become
available at normal retirement age 65, and must be used to
purchase a pension annuity.
Potential
Payments Upon Termination or Change in Control
The named executive officers are eligible to receive certain
benefits and payments upon their separation from the Company
under certain circumstances under the terms of the Executive
Severance Plan for U.S. executives and the Equity Incentive
Plan. In addition, Mr. Anderson is entitled to payments
under a Supplemental Executive Incentive Plan as described below.
In 2010, our U.S. severance arrangements under its
Executive Severance Plan offered named executive officers, basic
severance of two weeks of base salary and enhanced severance of
78 weeks of base salary plus their AIP target amount, if
their employment ceases due to a reduction in force, layoff or
position elimination. We also cover the cost of the COBRA health
coverage premium for the duration of the executive’s
severance payment period, up to a maximum of 18 months. The
COBRA premium coverage is shared between the individual and the
Company at the same shared percentage that was effective during
the executive’s employment. We would also provide life
insurance, career counseling and transition services. These
severance benefits would not be payable upon a change in control
if the executive is still employed or offered a comparable
position with the surviving entity.
Under the Equity Incentive Plan, in the event of a change in
control in which the surviving corporation does not assume or
continue the outstanding SARs or substitute similar awards for
the outstanding SARs, the vesting schedule of all SARs held by
executives that are still employed will be accelerated in full
to a date prior to the effective time of the transaction as
determined by the Board. If the SARs are not exercised at or
prior to the effective time of the transaction, all rights to
exercise them will terminate, and any reacquisition or
repurchase rights held by the Company with respect to such SARs
shall lapse.
116
Table of Contents
The information in the tables below reflects the estimated value
of the compensation to be paid by us to each of the named
executive officers in the event of termination or a change in
control under the Executive Severance Plan and the Equity
Incentive Plan. The amounts shown below assume that each named
individual was employed and that a termination or change in
control was effective as of November 28, 2010. The actual
amounts that would be paid can only be determined at the time of
an actual termination event. The amounts also assume a share
price of $44.50 for the SAR grants, which is based on the
Evercore share valuation dated as of December 31, 2010.
Mr. Broger and Mr. Szulc terminated on/or before
November 28, 2010. The actual payments associated with
their terminations are reported in the Summary Compensation
Table.
John
Anderson
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 4,065,288 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 5,519,240 | |||||||||||||||
|
Benefits:
|
||||||||||||||||||||
|
COBRA & Life
Insurance
(2)
|
— | — | 7,899 | — | — | |||||||||||||||
|
Supplemental Executive Incentive
Plan:
(3)
|
4,048,719 | 4,048,719 | 4,048,719 | — | 4,048,719 | |||||||||||||||
| (1) | Based on Mr. Anderson’s annual base salary of $1,275,000 and his AIP target of 110% of his base salary. | |
| (2) | Reflects 18 months of COBRA and life insurance premiums at the same Company/employee percentage sharing as during employment. | |
| (3) | Reflects a lump sum payment under the Supplemental Executive Incentive Plan in which Mr. Anderson previously participated. The Company contributed 20% of his base salary and annual bonus into this unfunded plan each year. His participation in the plan was frozen as of November 26, 2006, when he assumed the role of CEO. |
Blake
Jorgensen
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 1,731,250 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 2,246,360 | |||||||||||||||
|
Benefits:
|
||||||||||||||||||||
|
COBRA & Life
Insurance
(2)
|
— | — | 6,158 | — | — | |||||||||||||||
| (1) | Based on Mr. Jorgensen’s annual base salary of $650,000 and his AIP target of 75% of his base salary. | |
| (2) | Reflects 18 months of COBRA and life insurance premiums at the same Company/employee percentage sharing as during employment. |
Robert
Hanson
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 2,321,106 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 1,502,598 | |||||||||||||||
|
Benefits:
|
||||||||||||||||||||
|
COBRA & Life
Insurance
(2)
|
— | — | 5,899 | — | — | |||||||||||||||
| (1) | Based on Mr. Hanson’s annual base salary of $825,000 and his AIP target of 85% of his base salary. | |
| (2) | Reflects 18 months of COBRA and life insurance premiums at the same Company/employee percentage sharing as during employment. |
117
Table of Contents
Aaron
Boey
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 366,667 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 606,953 | |||||||||||||||
| (1) | Based on two months of Mr. Boey’s annual base salary of $628,571 as notice pay and five months’ salary based on years of service, per the local Singapore provisions. |
Jim
Calhoun
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 1,303,366 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 635,222 | |||||||||||||||
|
Benefits:
|
||||||||||||||||||||
|
COBRA & Life
Insurance
(2)
|
— | — | 8,158 | — | — | |||||||||||||||
| (1) | Based on Mr. Calhoun’s annual base salary of $575,000 and his AIP target of 65% of his base salary. | |
| (2) | Reflects 18 months of COBRA and life insurance premiums at the same Company/employee percentage sharing as during employment. |
DIRECTOR
COMPENSATION
The following table provides compensation information for our
directors who were not employees in fiscal 2010:
|
Fees Earned
|
||||||||||||||||
|
or Paid in
|
Stock
|
All Other
|
||||||||||||||
|
Name
|
Cash | Awards (1) | Compensation (2) | Total | ||||||||||||
|
Richard L. Kauffman
|
$ | 210,000 | $ | 241,656 | $ | 4,313 | $ | 455,969 | ||||||||
|
Robert D.
Haas
(3)
|
105,000 | 99,969 | 196,547 | 401,516 | ||||||||||||
|
Fernando
Aguirre
(4)
|
16,666 | — | — | 16,666 | ||||||||||||
|
Vanessa J. Castagna
|
100,000 | 99,969 | 3,760 | 203,729 | ||||||||||||
|
Robert A. Eckert
|
50,000 | 116,642 | — | 166,642 | ||||||||||||
|
Peter A.
Georgescu
(5)
|
55,000 | — | 42,365 | 97,365 | ||||||||||||
|
Peter E. Haas, Jr.
|
100,000 | 99,969 | 3,723 | 203,692 | ||||||||||||
|
Leon J.
Level
(6)
|
120,000 | 99,969 | 11,223 | 231,192 | ||||||||||||
|
Stephen C. Neal
|
100,000 | 99,969 | 3,760 | 203,729 | ||||||||||||
|
Patricia Salas
Pineda
(7)
|
120,000 | 99,969 | 11,625 | 231,594 | ||||||||||||
|
T. Gary
Rogers
(8)
|
50,000 | — | 88,251 | 138,251 | ||||||||||||
|
Martin
Coles
(9)
|
25,000 | — | 64,277 | 89,277 | ||||||||||||
118
Table of Contents
| (1) | These amounts, from RSUs granted under the Equity Incentive Plan in 2010, reflect the aggregate grant date fair value computed in accordance with the Company’s accounting policy for stock-based compensation. The following table shows the aggregate number of RSUs outstanding but unexercised at fiscal year-end for those who were directors at fiscal year-end, including RSUs that were vested but deferred and RSUs that were not vested: |
|
Aggregate
|
||||
|
Outstanding
|
||||
|
Name
|
RSUs | |||
|
Richard L. Kauffman
|
12,624 | |||
|
Robert D. Haas
|
7,871 | |||
|
Fernando Aguirre
|
— | |||
|
Vanessa J. Castagna
|
7,877 | |||
|
Robert A. Eckert
|
3,309 | |||
|
Peter E. Haas, Jr.
|
7,847 | |||
|
Leon J. Level
|
7,847 | |||
|
Stephen C. Neal
|
7,877 | |||
|
Patricia Salas Pineda
|
9,437 | |||
| (2) | This column includes $87,448 for Mr. Rogers based on a modification of previous grants in connection with his departure from the Board on December 4, 2009, $63,364 for Mr. Coles in connection with his departure from the Board on January 11, 2010, and $38,240 for Mr. Georgescu in connection with his departure from the Board on January 11, 2010. This column also includes the aggregate grant date fair value of dividend equivalents provided to each director in 2010 in the following amounts: |
|
Dividend
|
||||
|
Equivalent
|
||||
|
Name
|
RSUs Granted | |||
|
Richard L. Kauffman
|
118 | |||
|
Robert D. Haas
|
57 | |||
|
Vanessa J. Castagna
|
103 | |||
|
Peter A. Georgescu
|
113 | |||
|
Peter E. Haas, Jr.
|
102 | |||
|
Leon J. Level
|
57 | |||
|
Stephen C. Neal
|
103 | |||
|
Patricia Salas Pineda
|
113 | |||
|
T. Gary Rogers
|
22 | |||
|
Martin Coles
|
25 | |||
| (3) | Includes administrative support services valued at $150,890, use of an office valued at $18,486, provision of a car at a value of $10,094, home security services and charitable matches of $7,500 for his services as Chairman Emeritus. | |
| (4) | Mr. Aguirre elected to defer 100% ($16,666) of his director’s fees under the Deferred Compensation Plan. His 2010 fees were prorated based on his start date of October 2010. | |
| (5) | Peter A. Georgescu departed from the Board on July 7, 2010. | |
| (6) | Includes charitable matches of $7,500. | |
| (7) | Ms. Pineda elected to defer 50% ($60,000) of her director’s fees under the Deferred Compensation Plan. Her 2010 amount also includes charitable matches of $7,500. | |
| (8) | T. Gary Rogers departed from the Board on December 4, 2009. | |
| (9) | Martin Coles departed from the Board on January 11, 2010. |
Richard L. Kauffman, as Chairman of the Board, was entitled to
receive an annual retainer in the amount of $200,000, 50% of
which was to be paid in cash and 50% of which was to be paid in
the form of restricted stock units (“RSUs”). In
addition, Mr. Kauffman was eligible to receive the
non-employee director cash compensation as described below.
119
Table of Contents
Robert D. Haas was Chairman of the Board prior to
February 8, 2008. He has continued to serve as a director
and is entitled to be Chairman Emeritus of the Board until 2018.
In his role as Chairman Emeritus, we provide Mr. Haas an
office, related administrative support, a leased car with driver
and home security services.
Each non-employee director received compensation in 2010
consisting of an annual cash retainer fee of $100,000 and, if
applicable, committee chairperson retainer fees ($20,000 for the
Audit Committee and the Human Resources Committee, and $10,000
for the Finance Committee and the Nominating and Governance
Committee).
Each non-employee director also received an annual equity award
in the form of RSUs. Under the terms of the Equity Incentive
Plan, all directors who held RSUs as of May 3, 2010,
received additional RSUs as a dividend equivalent under the
terms of the Equity Incentive Plan. All dividend equivalents
will be subject to all the terms and conditions of the
underlying Restricted Stock Unit Award Agreement to which they
relate.
RSUs are granted under the Equity Incentive Plan. RSUs are
units, representing beneficial ownership interests,
corresponding in number and value to a specified number of
underlying shares of stock. Currently, RSUs have only been
granted to our non-employee directors. The RSUs vest in three
equal installments after thirteen, twenty-four and thirty-six
months following the grant date. After the recipient of the RSU
has held the shares for six months, he or she may require the
Company to repurchase, or the Company may require the
participant to sell to the Company, those shares of common
stock. If the director’s service terminates for reason
other than cause after the first, but prior to full vesting,
then any unvested portion of the award will fully vest as of the
date of such termination. The value of the RSUs is tracked
against the Company’s share prices, established by the
Evercore valuation process.
In 2007, the Board approved stock ownership guidelines for our
non-employee Board members consistent with governance practices
of similarly-situated companies. The ownership target is
$300,000 worth of equity ownership, to be achieved within five
years. Therefore, RSUs were granted under the Equity Incentive
Plan, rather than other available forms of equity compensation,
in order to provide the directors with immediate stock ownership
to facilitate achievement of the ownership guidelines. In
addition, each director’s initial RSU grant includes a
deferral delivery feature, under which the director will not
receive the vested awards until six months following the
cessation of service on the Board.
Directors are covered under travel accident insurance while on
Company business, as are all employees, and the non-employee
directors are eligible to participate in the provisions of the
Deferred Compensation Plan for Executives and Outside Directors
that apply to directors. In 2010, Mr. Aguirre and
Ms. Pineda participated in this Deferred Compensation Plan.
Compensation
Committee Interlocks and Insider Participation
The Human Resources Committee serves as the compensation
committee of our board of directors. Its members are
Ms. Pineda (Chair), Ms. Castagna, Mr. Eckert,
Mr. P.E. Haas Jr. and Mr. R.D. Haas. In 2010, no
member of the Human Resources Committee was a current officer or
employee of ours. Mr. R.D. Haas served as our Chief
Executive Officer from 1984 to 1999. There are no compensation
committee interlocks between us and other entities involving our
executive officers and our Board members who serve as executive
officers of those other entities.
120
Table of Contents
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
All shares of our common stock are deposited in a voting trust,
a legal arrangement that transfers the voting power of the
shares to a trustee or group of trustees. The four voting
trustees are Miriam L. Haas, Peter E. Haas Jr., Robert D. Haas
and Stephen C. Neal. The voting trustees have the exclusive
ability to elect and remove directors, amend our by-laws and
take certain other actions which would normally be within the
power of stockholders of a Delaware corporation. Our equity
holders who, as a result of the voting trust, legally hold
“voting trust certificates,” not stock, retain the
right to direct the trustees on specified mergers and business
combinations, liquidations, sales of substantially all of our
assets and specified amendments to our certificate of
incorporation.
The voting trust will expire on April 15, 2011. As a
result, the voting trust certificates will be replaced by
certificates for shares of common stock, and the voting powers
currently held by the voting trustees will shift to the hands of
all stockholders, and the stockholders will engage in voting
procedures directly as voting matters arise.
The following table contains information about the beneficial
ownership of our voting trust certificates as of
January 31, 2011, by:
| • | Each person known by us to own beneficially more than 5% of our voting trust certificates; | |
| • | Each of our directors and each of our named executive officers; and | |
| • | All of our directors and executive officers as a group. |
Under the rules of the SEC, a person is deemed to be a
“beneficial owner” of a security if that person has or
shares “voting power,” which includes the power to
vote or to direct the voting of the security, or
“investment power,” which includes the power to
dispose of or to direct the disposition of the security. Under
these rules, more than one person may be deemed a beneficial
owner of the same securities and a person may be deemed to be a
beneficial owner of securities as to which that person has no
economic interest. Except as described in the footnotes to the
table below, the individuals named in the table have sole voting
and investment power with respect to all voting trust
certificates beneficially owned by them, subject to community
property laws where applicable.
121
Table of Contents
As of January 31, 2011, there were 213 record holders of
voting trust certificates. The percentage of beneficial
ownership shown in the table is based on 37,323,947 shares
of common stock and related voting trust certificates
outstanding as of January 31, 2011. The business address of
all persons listed, including the trustees under the voting
trust, is 1155 Battery Street, San Francisco, California
94111.
|
Percentage of
|
||||||||
|
Number of Voting
|
Voting Trust
|
|||||||
|
Trust Certificates
|
Certificates
|
|||||||
|
Name
|
Beneficially Owned | Outstanding | ||||||
|
Miriam L. Haas
|
6,547,314 | 17.54 | % | |||||
|
Peter E. Haas, Jr.
|
6,162,534 | (1) | 16.51 | % | ||||
|
Margaret E. Haas
|
4,245,881 | (2) | 11.38 | % | ||||
|
Robert D. Haas
|
3,947,343 | (3) | 10.58 | % | ||||
|
Vanessa J. Castagna
|
2,906 | * | ||||||
|
Richard L. Kauffman
|
1,327 | * | ||||||
|
Leon J. Level
|
2,906 | * | ||||||
|
Stephen C. Neal
|
2,906 | * | ||||||
|
Patricia Salas Pineda
|
1,327 | * | ||||||
|
R. John Anderson
|
— | — | ||||||
|
Robert A. Eckert
|
— | — | ||||||
|
Fernando Aguirre
|
— | — | ||||||
|
Aaron Beng-Keong Boey
|
— | — | ||||||
|
Robert L. Hanson
|
— | — | ||||||
|
James A. Calhoun
|
— | — | ||||||
|
Blake Jorgensen
|
— | — | ||||||
|
Directors and executive officers as a group (14 persons)
|
10,121,249 | 27.12 | % | |||||
| * | Less than 0.01%. | |
| (1) | Includes 2,657,278 voting trust certificates held by the Joanne and Peter Haas Jr. Fund, of which Mr. Haas is president, for the benefit of charitable entities. Includes an aggregate of 1,202,351 voting trust certificates held by the spouse of Mr. Haas and by trusts, of which Mr. Haas is trustee, for the benefit of his children. Mr. Haas disclaims beneficial ownership of all the foregoing voting trust certificates. Also includes 2,200,000 voting trust certificates representing shares of common stock pledged to a third party as collateral for a loan. | |
| (2) | Includes 20,793 voting trust certificates held in a custodial account, of which Ms. Haas is custodian, for the benefit of Ms. Haas’ son. Includes 886,122 voting trust certificates held by the Margaret E. Haas Fund, of which Ms. Haas is president, for the benefit of charitable entities. Ms. Haas disclaims beneficial ownership of all of the foregoing voting trust certificates. | |
| (3) | Includes an aggregate of 51,401 voting trust certificates owned by the spouse of Mr. Haas and by a trust, of which Mr. Haas is trustee, for the benefit of their daughter. Includes 389 voting trust certificates held by the Walter A. Haas, Jr. QTIP Trust A, of which Mr. Haas is a co-trustee, for the benefit of his mother. Mr. Haas disclaims beneficial ownership of all of the foregoing voting trust certificates. |
Equity
Compensation Plan Information
The following table sets forth certain information, as of
November 28, 2010, with respect to the EIP, our only equity
compensation plan. This plan was approved by our stockholders.
See Note 11 to our audited consolidated financial
statements included in this report for more information about
the EIP.
|
Weighted-Average
|
Number of Securities
|
|||||||||||||
|
Number of Securities to
|
Exercise Price of
|
Remaining Available
|
||||||||||||
|
Number of
|
Be Issued Upon Exercise
|
Outstanding
|
for Future Issuance
|
|||||||||||
|
Outstanding Options,
|
of Outstanding Options,
|
Options, Warrants
|
Under Equity
|
|||||||||||
|
Warrants and
Rights
(1)
|
Warrants and Rights (2) | and Rights (1) | Compensation Plans (3) | |||||||||||
| 1,590,100 | 318,560 | $ | 35.58 | 337,320 | ||||||||||
| (1) | Includes only dilutive SARs. | |
| (2) | Represents the number of shares of common stock the dilutive SARs would convert to if exercised November 28, 2010, calculated based on the conversion formula as defined in the plan and the fair market value of our common stock on that date as determined by an independent third party. |
122
Table of Contents
| (3) | Calculated based on the number of stock awards authorized upon the adoption of the EIP, less the number of securities to be issued upon exercise of outstanding dilutive SARs, less voting trust certificates issued in connection with converted RSUs; does not reflect 66,255 securities expected to be issued in the future upon conversion of outstanding RSUs. Note that the following shares may return to the EIP and be available for issuance in connection with a future award: (i) shares covered by an award that expires or otherwise terminates without having been exercised in full; (ii) shares that are forfeited or repurchased by us prior to becoming fully vested; (iii) shares covered by an award that is settled in cash; (iv) shares withheld to cover payment of an exercise price or cover applicable tax withholding obligations; (v) shares tendered to cover payment of an exercise price; and (vi) shares that are cancelled pursuant to an exchange or repricing program. |
Stockholders’
Agreement
Our common stock and the voting trust certificates are not
publicly held or traded. All shares and the voting trust
certificates are subject to a stockholders’ agreement. The
agreement, which expires in April 2016, limits the transfer of
shares and certificates to other holders, family members,
specified charities and foundations and to us. The agreement
does not provide for registration rights or other contractual
devices for forcing a public sale of shares, certificates or
other access to liquidity. The scheduled expiration date of the
stockholders’ agreement is five years later than that of
the voting trust agreement in order to permit an orderly
transition from effective control by the voting trust trustees
to direct control by the stockholders.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Robert D. Haas, a director and Chairman Emeritus of our board of
directors, is the President of the Levi Strauss Foundation,
which is not a consolidated entity of the Company. During 2010,
we donated $3.1 million to the Levi Strauss Foundation.
Stephen C. Neal, a director, is chairman of the law firm Cooley
LLP. The firm provided legal services to us in 2010 for which we
paid fees of approximately $0.2 million.
Procedures
for Approval of Related Party Transactions
We have a written policy concerning the review and approval of
related party transactions. Potential related party transactions
are identified through an internal review process that includes
a review of director and officer questionnaires and a review of
any payments made in connection with transactions in which
related persons may have had a direct or indirect material
interest. Any business transactions or commercial relationships
between the Company and any director, stockholder, or any of
their immediate family members, are reviewed by the Nominating
and Governance Committee of the board and must be approved by at
least a majority of the disinterested members of the board.
Business transactions or commercial relationships between the
Company and named executive officers who are not directors or
any of their immediate family members requires approval of the
chief executive officer with reporting to the Audit Committee.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Engagement of the independent registered public accounting
firm.
The audit committee is responsible for
approving every engagement of our independent registered public
accounting firm to perform audit or non-audit services for us
before being engaged to provide those services. The audit
committee’s pre-approval policy provides as follows:
| • | First, once a year when the base audit engagement is reviewed and approved, management will identify all other services (including fee ranges) for which management knows or believes it will engage our independent registered public accounting firm for the next 12 months. Those services typically include quarterly reviews, employee benefit plan reviews, specified tax matters, certifications to the lenders as required by financing documents, and consultation on new accounting and disclosure standards. | |
| • | Second, if any new proposed engagement comes up during the year that was not pre-approved by the audit committee as discussed above, the engagement will require: (i) specific approval of the chief financial officer and corporate controller (including confirming with counsel permissibility under applicable laws and evaluating potential impact on independence) and, if approved by management, (ii) approval of the audit committee. |
123
Table of Contents
| • | Third, the chair of the audit committee will have the authority to give such approval, but may seek full audit committee input and approval in specific cases as he or she may determine. |
Auditor fees.
The following table shows fees
billed to or incurred by us for professional services rendered
by PricewaterhouseCoopers LLP, our independent registered public
accounting firm during 2010 and 2009:
|
Year Ended
|
Year Ended
|
|||||||
|
November 28,
|
November 29,
|
|||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Services provided:
|
||||||||
|
Audit
fees
(1)
|
$ | 5,103 | $ | 4,328 | ||||
|
Audit-related
fees
(2)
|
166 | 977 | ||||||
|
Tax services
|
179 | 302 | ||||||
|
Total fees
|
$ | 5,448 | $ | 5,607 | ||||
| (1) | Includes fees for the audit of our annual consolidated financial statements, quarterly reviews of interim consolidated financial statements and statutory audits. | |
| (2) | Principally comprised of fees related to controls reviews on our enterprise resource planning system in 2010 and due diligence for our acquisitions in 2009. |
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Table of Contents
PART IV
| Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
List the following documents filed as a part of the report:
1. Financial Statements
The following consolidated financial statements of the Company
are included in Item 8:
|
Report of Independent Registered Public Accounting Firm
|
||||
|
Consolidated Balance Sheets
|
||||
|
Consolidated Statements of Income
|
||||
|
Consolidated Statements of Stockholders’ Deficit and
Comprehensive Income
|
||||
|
Consolidated Statements of Cash Flows
|
||||
|
Notes to Consolidated Financial Statements
|
2. Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts
All other schedules have been omitted because they are
inapplicable, not required or the information is included in the
Consolidated Financial Statements or Notes thereto.
|
Exhibits
|
||
|
3.1
|
Restated Certificate of Incorporation. Incorporated by reference as Exhibit 3.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 6, 2001. | |
|
3.2
|
Amended and Restated By-Laws. Incorporated by reference as Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on July 12, 2005. | |
|
4.1
|
Fiscal Agency Agreement, dated November 21, 1996, between the Registrant and Citibank, N.A., relating to ¥20 billion 4.25% bonds due 2016. Incorporated by reference as Exhibit 4.2 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | |
|
4.2
|
Indenture, relating to the Euro denominated Senior Notes due 2018 and the U.S. Dollar denominated Senior Notes due 2020, dated as of May 6, 2010, between the Registrant and Wells Fargo Bank, National Association, as trustee. Incorporated by reference as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 7, 2010. | |
|
4.3
|
Indenture relating to the 8.875% Senior Notes due 2016, dated as of March 17, 2006, between the Registrant and Wilmington Trust Company, as trustee. Incorporated by reference as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 17, 2006. | |
|
4.4
|
Voting Trust Agreement, dated April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant), Robert D. Haas, Peter E. Haas, Sr., Peter E. Haas Jr., F. Warren Hellman, as voting trustees, and the stockholders. Incorporated by reference as Exhibit 9 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | |
|
10.1
|
Stockholders Agreement, dated April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant) and the stockholders. Incorporated by reference as Exhibit 10.1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | |
|
10.2
|
Supply Agreement, dated March 30, 1992, and First Amendment to Supply Agreement, between the Registrant and Cone Mills Corporation. Incorporated by reference as Exhibit 10.18 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | |
|
10.3
|
Second Amendment to Supply Agreement dated May 13, 2002, between the Registrant and Cone Mills Corporation dated as of March 30, 1992. Incorporated by reference as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q/A filed with the Commission on September 19, 2002. | |
|
10.4
|
Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2003. Incorporated by reference as Exhibit 10.64 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 12, 2003.* |
125
Table of Contents
|
Exhibits
|
||
|
10.5
|
First Amendment to Deferred Compensation Plan for Executives and Outside Directors, dated November 17, 2003. Incorporated by reference as Exhibit 10.69 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2004.* | |
|
10.6
|
Second Amendment to Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2005. Incorporated by reference as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 12, 2004.* | |
|
10.7
|
Executive Severance Plan effective January 16, 2008. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on January 23, 2008. | |
|
10.8
|
Excess Benefit Restoration Plan. Incorporated by reference as Exhibit 10.27 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000.* | |
|
10.9
|
Supplemental Benefit Restoration Plan. Incorporated by reference as Exhibit 10.28 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000.* | |
|
10.10
|
Amendment to Supplemental Benefit Restoration Plan effective January 1, 2001. Incorporated by reference as Exhibit 10.47 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001.* | |
|
10.11
|
Annual Incentive Plan, effective November 29, 2004. Incorporated by reference as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on July 12, 2005.* | |
|
10.12
|
2006 Equity Incentive Plan. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 19, 2006.* | |
|
10.13
|
Form of stock appreciation right award agreement. Incorporated by reference as Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the Commission on July 19, 2006.* | |
|
10.14
|
Rabbi Trust Agreement, effective January 1, 2003, between the Registrant and Boston Safe Deposit and Trust Company. Incorporated by reference as Exhibit 10.65 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 12, 2003.* | |
|
10.15
|
Offer letter dated October 17, 2006, from the Registrant to John Anderson. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on October 27, 2006.* | |
|
10.16
|
Amendment of November 28, 2006, to offer letter dated October 17, 2006, from the Registrant to John Anderson. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 30, 2006.* | |
|
10.17
|
Limited Waiver dated as of March 1, 2007, by and among Levi Strauss & Co., the financial institutions listed therein and Bank of America, N.A. as agent for lenders. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 2, 2007. | |
|
10.18
|
Term Loan Agreement, dated as of March 27, 2007, among Levi Strauss & Co., the lenders and other financial institutions party thereto and Bank of America, N.A. as administrative agent. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 30, 2007. | |
|
10.19
|
Employment Contract and related agreements, dated as of February 23, 2007, between Armin Broger and Levi Strauss Nederland B.V. and various affiliates. Incorporated by reference as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 10, 2007.* | |
|
10.20
|
Second Amended and Restated Credit Agreement, dated October 11, 2007, among Levi Strauss & Co., Levi Strauss Financial Center Corporation, the financial institutions party thereto and Bank of America, N.A., as agent, to the First Amended and Restated Credit Agreement, dated May 18, 2006, between Levi Strauss & Co., Levi Strauss Financial Center Corporation, the financial institutions party thereto and Bank of America, N.A., as agent. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | |
|
10.21
|
Second Amended and Restated Pledge and Security Agreement, dated October 11, 2007, by Levi Strauss & Co. and certain subsidiaries of Levi Strauss & Co. in favor of the agent. Incorporated by reference as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. |
126
Table of Contents
|
Exhibits
|
||
|
10.22
|
Trademark Security Agreement, dated October 11, 2007, by Levi Strauss & Co. in favor of the agent. Incorporated by reference as Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | |
|
10.23
|
First Amended and Restated Subsidiary Guaranty, dated October 11, 2007, by certain subsidiaries of Levi Strauss & Co. in favor of the agent. Incorporated by reference as Exhibit 10.4 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | |
|
10.24
|
Director Indemnification Agreement. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 10, 2008. | |
|
10.25
|
Employment Offer Letter, dated May 27, 2009, between Levi Strauss & Co. and Blake Jorgensen. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 28, 2009.* | |
|
10.26
|
Employment Offer Letter, dated August 19, 2009, between Levi Strauss & Co. and Jaime Cohen Szulc. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on August 25, 2009.* | |
|
10.27
|
Second Amendment to Lease, dated November 12, 2009, by and among the Registrant, Blue Jeans Equities West, a California general partnership, Innsbruck LP, a California limited partnership, and Plaza GB LP, a California limited partnership. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 25, 2009. | |
|
10.28
|
Purchase Agreement, dated April 28, 2010, among the Registrant and Merrill Lynch International and Banc of America Securities LLC relating to the private placement of Euro denominated 7 3 / 4 % Senior Notes due 2018 and U.S. Dollar denominated 7 5 / 8 % Senior Notes due 2020. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 4, 2010. | |
|
12
|
Statements re: Computation of Ratio of Earnings to Fixed Charges. Filed herewith. | |
|
14.1
|
Worldwide Code of Business Conduct of Registrant. Incorporated by reference as Exhibit 14 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2004. | |
|
21
|
Subsidiaries of the Registrant. Filed herewith. | |
|
24
|
Power of Attorney. Contained in signature pages hereto. | |
|
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
|
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
|
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
| * | Management contract, compensatory plan or arrangement. |
127
Table of Contents
SCHEDULE II
LEVI
STRAUSS & CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
VALUATION AND QUALIFYING ACCOUNTS
|
Balance at
|
Additions
|
Balance at
|
||||||||||||||
|
Beginning
|
Charged to
|
End of
|
||||||||||||||
|
Allowance for Doubtful Accounts
|
of Period | Expenses | Deductions (1) | Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
November 28, 2010
|
$ | 22,523 | $ | 7,536 | $ | 5,442 | $ | 24,617 | ||||||||
|
November 29, 2009
|
$ | 16,886 | $ | 7,246 | $ | 1,609 | $ | 22,523 | ||||||||
|
November 30, 2008
|
$ | 14,805 | $ | 10,376 | $ | 8,295 | $ | 16,886 | ||||||||
|
Balance at
|
Additions
|
Balance at
|
||||||||||||||
|
Beginning
|
Charged to
|
End of
|
||||||||||||||
|
Sales Returns
|
of Period | Net Sales | Deductions (1) | Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
November 28, 2010
|
$ | 33,106 | $ | 133,012 | $ | 118,427 | $ | 47,691 | ||||||||
|
November 29, 2009
|
$ | 37,333 | $ | 115,554 | $ | 119,781 | $ | 33,106 | ||||||||
|
November 30, 2008
|
$ | 54,495 | $ | 126,481 | $ | 143,643 | $ | 37,333 | ||||||||
|
Balance at
|
Additions
|
Balance at
|
||||||||||||||
|
Beginning
|
Charged to
|
End of
|
||||||||||||||
|
Sales Discounts and Incentives
|
of Period | Net Sales | Deductions (1) | Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
November 28, 2010
|
$ | 85,627 | $ | 274,903 | $ | 269,970 | $ | 90,560 | ||||||||
|
November 29, 2009
|
$ | 95,793 | $ | 257,022 | $ | 267,188 | $ | 85,627 | ||||||||
|
November 30, 2008
|
$ | 106,615 | $ | 266,169 | $ | 276,991 | $ | 95,793 | ||||||||
|
Balance at
|
Charges/
|
Balance at
|
||||||||||||||
|
Valuation Allowance Against
|
Beginning
|
(Releases) to
|
(Additions)/
|
End of
|
||||||||||||
|
Deferred Tax Assets
|
of Period | Tax Expense | Deductions (1) | Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
November 28, 2010
|
$ | 72,986 | $ | 28,278 | $ | 4,238 | $ | 97,026 | ||||||||
|
November 29, 2009
|
$ | 58,693 | $ | 4,090 | $ | (10,203 | ) | $ | 72,986 | |||||||
|
November 30, 2008
|
$ | 73,596 | $ | (1,768 | ) | $ | 13,135 | $ | 58,693 | |||||||
| (1) | The charges to the accounts are for the purposes for which the allowances were created. |
128
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LEVI STRAUSS & CO.
| By: |
/s/
Blake
Jorgensen
|
Blake Jorgensen
Executive Vice President and
Chief Financial Officer
Date: February 8, 2011
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Heidi L. Manes,
Jennifer W. Chaloemtiarana and Charles P. Sandel and each of
them, his or her attorney-in-fact with power of substitution for
him or her in any and all capacities, to sign any amendments,
supplements or other documents relating to this Annual Report on
Form 10-K
he or she deems necessary or appropriate, and to file the same,
with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that such attorney-in-fact or their
substitute may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Title
|
|||||
|
/s/
Richard
L. Kauffman
|
Chairman of the Board | Date: February 8, 2011 | ||||
|
/s/
R.
John Anderson
|
Director, President and Chief
Executive Officer |
Date: February 8, 2011 | ||||
|
/s/
Robert
D. Haas
|
Director, Chairman Emeritus | Date: February 8, 2011 | ||||
|
/s/
Vanessa
J. Castagna
|
Director | Date: February 8, 2011 | ||||
|
/s/
Fernando
Aguirre
|
Director | Date: February 8, 2011 | ||||
|
/s/
Robert
A. Eckert
|
Director | Date: February 8, 2011 | ||||
|
/s/
Peter
E. Haas Jr.
|
Director | Date: February 8, 2011 | ||||
|
/s/
Leon
J. Level
|
Director | Date: February 8, 2011 | ||||
129
Table of Contents
|
Signature
|
Title
|
|||||
|
/s/
Stephen
C. Neal
|
Director | Date: February 8, 2011 | ||||
|
/s/
Patricia
Salas Pineda
|
Director | Date: February 8, 2011 | ||||
|
/s/
Heidi
L. Manes
|
Vice President and Controller (Principal Accounting Officer) | Date: February 8, 2011 | ||||
130
Table of Contents
SUPPLEMENTAL
INFORMATION
We will furnish our 2010 annual report to our voting trust
certificate holders after the filing of this
Form 10-K
and will furnish copies of such material to the SEC at such
time. No proxy statement will be sent to our voting trust
certificate holders.
131
Table of Contents
EXHIBITS INDEX
| 3 | .1 | Restated Certificate of Incorporation. Incorporated by reference as Exhibit 3.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 6, 2001. | ||
| 3 | .2 | Amended and Restated By-Laws. Incorporated by reference as Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on July 12, 2005. | ||
| 4 | .1 | Fiscal Agency Agreement, dated November 21, 1996, between the Registrant and Citibank, N.A., relating to ¥20 billion 4.25% bonds due 2016. Incorporated by reference as Exhibit 4.2 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | ||
| 4 | .2 | Indenture, relating to the Euro denominated Senior Notes due 2018 and the U.S. Dollar denominated Senior Notes due 2020, dated as of May 6, 2010, between the Registrant and Wells Fargo Bank, National Association, as trustee. Incorporated by reference as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 7, 2010. | ||
| 4 | .3 | Indenture relating to the 8.875% Senior Notes due 2016, dated as of March 17, 2006, between the Registrant and Wilmington Trust Company, as trustee. Incorporated by reference as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 17, 2006. | ||
| 4 | .4 | Voting Trust Agreement, dated April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant), Robert D. Haas, Peter E. Haas, Sr., Peter E. Haas Jr., F. Warren Hellman, as voting trustees, and the stockholders. Incorporated by reference as Exhibit 9 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | ||
| 10 | .1 | Stockholders Agreement, dated April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant) and the stockholders. Incorporated by reference as Exhibit 10.1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | ||
| 10 | .2 | Supply Agreement, dated March 30, 1992, and First Amendment to Supply Agreement, between the Registrant and Cone Mills Corporation. Incorporated by reference as Exhibit 10.18 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | ||
| 10 | .3 | Second Amendment to Supply Agreement dated May 13, 2002, between the Registrant and Cone Mills Corporation dated as of March 30, 1992. Incorporated by reference as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q/A filed with the Commission on September 19, 2002. | ||
| 10 | .4 | Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2003. Incorporated by reference as Exhibit 10.64 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 12, 2003.* | ||
| 10 | .5 | First Amendment to Deferred Compensation Plan for Executives and Outside Directors, dated November 17, 2003. Incorporated by reference as Exhibit 10.69 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2004.* | ||
| 10 | .6 | Second Amendment to Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2005. Incorporated by reference as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 12, 2004.* | ||
| 10 | .7 | Executive Severance Plan effective January 16, 2008. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on January 23, 2008. | ||
| 10 | .8 | Excess Benefit Restoration Plan. Incorporated by reference as Exhibit 10.27 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000.* | ||
| 10 | .9 | Supplemental Benefit Restoration Plan. Incorporated by reference as Exhibit 10.28 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000.* | ||
| 10 | .10 | Amendment to Supplemental Benefit Restoration Plan effective January 1, 2001. Incorporated by reference as Exhibit 10.47 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001.* | ||
| 10 | .11 | Annual Incentive Plan, effective November 29, 2004. Incorporated by reference as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on July 12, 2005.* | ||
| 10 | .12 | 2006 Equity Incentive Plan. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 19, 2006.* | ||
| 10 | .13 | Form of stock appreciation right award agreement. Incorporated by reference as Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the Commission on July 19, 2006.* | ||
| 10 | .14 | Rabbi Trust Agreement, effective January 1, 2003, between the Registrant and Boston Safe Deposit and Trust Company. Incorporated by reference as Exhibit 10.65 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 12, 2003.* | ||
| 10 | .15 | Offer letter dated October 17, 2006, from the Registrant to John Anderson. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on October 27, 2006.* |
Table of Contents
| 10 | .16 | Amendment of November 28, 2006, to offer letter dated October 17, 2006, from the Registrant to John Anderson. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 30, 2006.* | ||
| 10 | .17 | Limited Waiver dated as of March 1, 2007, by and among Levi Strauss & Co., the financial institutions listed therein and Bank of America, N.A. as agent for lenders. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 2, 2007. | ||
| 10 | .18 | Term Loan Agreement, dated as of March 27, 2007, among Levi Strauss & Co., the lenders and other financial institutions party thereto and Bank of America, N.A. as administrative agent. Incorporated by reference as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 30, 2007. | ||
| 10 | .19 | Employment Contract and related agreements, dated as of February 23, 2007, between Armin Broger and Levi Strauss Nederland B.V. and various affiliates. Incorporated by reference as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 10, 2007.* | ||
| 10 | .20 | Second Amended and Restated Credit Agreement, dated October 11, 2007, among Levi Strauss & Co., Levi Strauss Financial Center Corporation, the financial institutions party thereto and Bank of America, N.A., as agent, to the First Amended and Restated Credit Agreement, dated May 18, 2006, between Levi Strauss & Co., Levi Strauss Financial Center Corporation, the financial institutions party thereto and Bank of America, N.A., as agent. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | ||
| 10 | .21 | Second Amended and Restated Pledge and Security Agreement, dated October 11, 2007, by Levi Strauss & Co. and certain subsidiaries of Levi Strauss & Co. in favor of the agent. Incorporated by reference as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | ||
| 10 | .22 | Trademark Security Agreement, dated October 11, 2007, by Levi Strauss & Co. in favor of the agent. Incorporated by reference as Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | ||
| 10 | .23 | First Amended and Restated Subsidiary Guaranty, dated October 11, 2007, by certain subsidiaries of Levi Strauss & Co. in favor of the agent. Incorporated by reference as Exhibit 10.4 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | ||
| 10 | .24 | Director Indemnification Agreement. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 10, 2008. | ||
| 10 | .25 | Employment Offer Letter, dated May 27, 2009, between Levi Strauss & Co. and Blake Jorgensen. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 28, 2009.* | ||
| 10 | .26 | Employment Offer Letter, dated August 19, 2009, between Levi Strauss & Co. and Jaime Cohen Szulc. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on August 25, 2009.* | ||
| 10 | .27 | Second Amendment to Lease, dated November 12, 2009, by and among the Registrant, Blue Jeans Equities West, a California general partnership, Innsbruck LP, a California limited partnership, and Plaza GB LP, a California limited partnership. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 25, 2009. | ||
| 10 | .28 | Purchase Agreement, dated April 28, 2010, among the Registrant and Merrill Lynch International and Banc of America Securities LLC relating to the private placement of Euro denominated 7 3 / 4 % Senior Notes due 2018 and U.S. Dollar denominated 7 5 / 8 % Senior Notes due 2020. Incorporated by reference as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 4, 2010. | ||
| 12 | Statements re: Computation of Ratio of Earnings to Fixed Charges. Filed herewith. | |||
| 14 | .1 | Worldwide Code of Business Conduct of Registrant. Incorporated by reference as Exhibit 14 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2004. | ||
| 21 | Subsidiaries of the Registrant. Filed herewith. | |||
| 24 | Power of Attorney. Contained in signature pages hereto. | |||
| 31 | .1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
| 31 | .2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
| * | Management contract, compensatory plan or arrangement. |
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. Submission Of Matters To A Vote Of Security HoldersprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintPart D-equivalentprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintNote 1: Significant Accounting PoliciesprintNote 2: Property, Plant and EquipmentprintNote 3: Goodwill and Other Intangible AssetsprintNote 4: Fair Value Of Financial InstrumentsprintNote 5: Derivative Instruments and Hedging ActivitiesprintNote 6: DebtprintNote 7: GuaranteesprintNote 8: Employee Benefit PlansprintNote 9: Employee Investment PlansprintNote 10: Employee Incentive Compensation PlansprintNote 11: Stock-based Incentive Compensation PlansprintNote 12: Long-term Employee Related BenefitsprintNote 13: Commitments and ContingenciesprintNote 14: Dividend PaymentprintNote 15: Accumulated Other Comprehensive LossprintNote 16: Other Income (expense), NetprintNote 17: Income TaxesprintNote 18: Related PartiesprintNote 19: Business Segment InformationprintNote 20: Quarterly Financial Data (unaudited)printItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9a(t). Controls and ProceduresprintItem 9a(t)printItem 9B. Other InformationprintPart IIIprintItem 10. Directors and Executive OfficersprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits, Financial Statement Schedulesprint